<PAGE>
As filed with the Securities and Exchange Commission on April 26, 1999
REGISTRATION NO.
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
FORM S-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933 [X]
--------------
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 04-2461439
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
ONE SUN LIFE EXECUTIVE PARK, WELLESLEY HILLS, MASSACHUSETTS 02481
(781) 237-6030
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
COPIES TO:
EDWARD M. SHEA, ASSISTANT VICE PRESIDENT DAVID N. BROWN, ESQ.
AND SENIOR COUNSEL COVINGTON & BURLING
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.) 1201 PENNSYLVANIA AVENUE, N.W.
RETIREMENT PRODUCTS AND SERVICES P.O. BOX 7566
ONE COPLEY PLACE WASHINGTON, D.C. 20044
BOSTON, MASSACHUSETTS 02116
(617) 348-9600
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
--------------
Approximate date of commencement of proposed sale to the public:
From time to time after the effective date hereof
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities
Act, check the following box. /X/
If the registrant elects to deliver its latest annual report to security
holders, or a complete and legal facsimile thereof, pursuant to Item 11(a)(1)
of this Form, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / / __________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / __________
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / __________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. / /
-----------------------------------
Calculation of Registration Fee
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| |
Title of each class | Proposed maximum | Amount of
of securities to be | Aggregate Offering | Registration
registered | Price | Fee
| |
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| |
Fixed Annuity | $2,000,000,000 | $556,000(1)
Contracts | |
| |
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(1) Pursuant to Rule 457(o) under the Securities Act of 1933, the
registration fee is calculated based on the maximum aggregate offering
price of the securities registered hereby.
------------------------------
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this
registration statement shall thereafter become effective in accordance with
section 8(a) of the Securities Act of 1933 or until the registration
statement shall become effective on such date as the Commission acting
pursuant to said section 8(a), may determine.
<PAGE>
PART I
INFORMATION REQUIRED IN PROSPECTUS
Attached hereto and made a part hereof is the Prospectus dated May 1, 1999
for each of the following:
MFS Regatta Platinum
MFS Regatta Gold
Futurity II
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
MAY 1, 1999
PROFILE
MFS REGATTA PLATINUM
VARIABLE AND FIXED
ANNUITY
THIS PROFILE IS A SUMMARY OF SOME OF THE MORE IMPORTANT POINTS THAT YOU
SHOULD KNOW AND CONSIDER BEFORE PURCHASING THE CONTRACT. THE CONTRACT IS MORE
FULLY DESCRIBED IN THE FULL PROSPECTUS WHICH ACCOMPANIES THIS PROFILE. PLEASE
READ THE PROSPECTUS CAREFULLY.
1. THE MFS REGATTA PLATINUM ANNUITY
The MFS Regatta Platinum Annuity is a flexible payment deferred annuity
contract ("Contract") designed for use in connection with retirement and
deferred compensation plans, some of which may qualify for favorable federal
income tax treatment. The Contract is intended to help you achieve your
retirement savings or other long-term investment goals.
The Contract has two phases: an Accumulation Phase and an Income Phase.
During the Accumulation Phase you make payments into the Contract; any
investment earnings under your Contract accumulate on a tax-deferred basis and
are taxed as income only when withdrawn. During the Income Phase, we make
annuity payments in amounts determined in part by the amount of money you have
accumulated under your Contract during the Accumulation Phase. You choose when
the Income Phase begins.
You may choose among 25 variable investment options and a range of fixed
interest options. For a variable investment return you choose one or more
Sub-Accounts in our Variable Account, each of which invests in shares of a
corresponding series of the MFS/Sun Life Series Trust (collectively, the
"Series") listed in Section 4. The value of any portion of your Contract
allocated to the Sub-Accounts will fluctuate up or down depending on the
performance of the Series you select, and you may experience losses. For a fixed
interest rate, you may choose one or more Guarantee Periods offered in our Fixed
Account, each of which earns its own Guaranteed Interest Rate if you keep your
money in that Guarantee Period for the specified length of time.
The Contract is designed to meet your need for investment flexibility. At
any time you may have amounts allocated among up to 18 of the available variable
and fixed options. Until we begin making annuity payments under your Contract,
you can, subject to certain limitations, transfer money between options up to 12
times each year without a transfer charge or adverse tax consequences.
2. ANNUITY PAYMENTS (THE INCOME PHASE)
Just as you can elect to have your Contract value accumulate on either a
variable or fixed basis, or a combination of both, you can elect to receive
annuity payments on either a variable or fixed basis or both. If you choose to
have any part of your annuity payments come from the Sub-Accounts, the dollar
amount of your annuity payments may fluctuate.
The Contract offers a variety of annuity options. You can select from
among the following methods of receiving either variable or fixed annuity
payments under your Contract: (1) monthly payments continuing for your lifetime
(assuming you are the annuitant); (2) monthly payments for your lifetime, but
with payments continuing to your chosen beneficiary for 5, 10, 15 or 20 years if
you die before the end of the period you have selected; (3) monthly payments for
your lifetime and the life of another person (usually your spouse) you have
chosen; and (4) monthly payments for a specified number of years (between 5 and
30), with a cash-out option for variable payments. We may also agree to other
annuity options in our discretion.
Once the Income Phase begins, you cannot change your choice of annuity
payment method.
3. PURCHASING A CONTRACT
You may purchase a Contract for $10,000 or more, under most circumstances.
You may increase the value of your investment by adding $1,000 or more at any
time during the Accumulation Phase. We
<PAGE>
will not accept a Purchase Payment if your Account Value is over $1 million, or
if the Purchase Payment would cause your Account Value to exceed $1 million,
unless we have approved the Payment in advance.
4. ALLOCATION OPTIONS
You can allocate your money among Sub-Accounts investing in the following
Series of the MFS/ Sun Life Series Trust:
<TABLE>
<S> <C>
Bond Series Managed Sectors Series
Capital Appreciation Series Massachusetts Investors Growth Stock Series
Capital Opportunities Series Massachusetts Investors Trust Series
Emerging Growth Series MFS/Foreign & Colonial Emerging Markets Equity Series
Equity Income Series Money Market Series
Global Asset Allocation Series New Discovery Series
Global Governments Series Research Series
Global Growth Series Research Growth and Income Series
Global Total Return Series Research International Series
Government Securities Series Strategic Income Series
High Yield Series Total Return Series
International Growth Series Utilities Series
International Growth and Income
Series
</TABLE>
Market conditions will determine the value of an investment in any Series.
Each series is described in the Prospectus of the MFS/Sun Life Series Trust.
In addition to these variable options, you may also allocate your money to
one or more of the Guarantee Periods we make available. For each Guarantee
Period, we offer a Guaranteed Interest Rate for the specified length of time.
5. EXPENSES
The charges under the Contracts are as follows:
During the first 5 years of a Contract, we impose an annual Account Fee
equal to the lesser of $35 or 2% of the value of your Contract. After the fifth
year, we may change this fee annually, but it will never exceed the lesser of
$50 or 2% of the value of your Contract. During the Income Phase, the annual
Account Fee is $35. We also deduct insurance charges (which include an
administrative expense charge) equal to 1.40% per year of the average daily
value of the Contract allocated among the Sub-Accounts.
There are no sales charges when you purchase your MFS Regatta Platinum
Annuity. However, if you withdraw money from your Contract, we will, with
certain exceptions, impose a withdrawal charge. Your Contract allows a "free
withdrawal amount," which you may withdraw before you incur the withdrawal
charge. The rest of your withdrawal is subject to a withdrawal charge equal to a
percentage of each purchase payment you withdraw and is determined in accordance
with the table below. The percentage varies according to the number of Contract
years the purchase payment has been held in your account, including the year in
which you made the payment, but not the year in which you withdraw it.
<TABLE>
<CAPTION>
NUMBER OF
YEARS IN ACCOUNT WITHDRAWAL CHARGE
- ----------------- -----------------------
<S> <C>
0-1 6%
2-3 5%
4-5 4%
6 3%
7 or more 0%
</TABLE>
If you withdraw, transfer, or annuitize money allocated to a Guarantee
Period more than 30 days before the expiration date of the Guarantee Period, the
amount will be subject to a Market Value
2
<PAGE>
Adjustment. This adjustment reflects the relationship between our current
Guaranteed Interest Rates and the Guaranteed Interest Rate applicable to the
amount being withdrawn. Generally, if your Guaranteed Interest Rate is lower
than the relevant current rate, then the adjustment will decrease your Contract
value. Conversely, if your Guaranteed Interest Rate is higher than the relevant
current rate, the adjustment will increase your Contract value. The Market Value
Adjustment will not apply to the withdrawal of interest credited during the
current year, or to transfers as part of our dollar cost averaging program.
In addition to the charges we impose under the Contracts, there are
charges (which include management fees and operating expenses) imposed by each
Series, which range from 0.56% to 1.55% of the average net assets of the Series,
depending upon which Series you have selected. The investment adviser has agreed
to waive or reimburse a portion of expenses for some of the Series; without this
agreement, Series expenses could be higher. Some of these arrangements may be
terminated after one year, or earlier if the Series Fund's Board of Trustees
agrees.
The following chart is designed to help you understand the expenses you
will incur under your Contract, if you invest in one or more of the
Sub-Accounts. The column "Total Annual Expenses" shows the sum of the "Total
Annual Insurance Charges," as defined just above the chart, and the total
expenses for each Series. The next two columns show two examples of the
expenses, in dollars, you would pay under a Contract. The examples assume that
you invested $1,000 in a Contract which earns 5% annually and that you withdraw
your money (1) at the end of one year or (2) at the end of 10 years. For the
first year, the Total Annual Expenses are deducted, as well as withdrawal
charges. For year 10, the example shows the aggregate of all of the annual
expenses deducted for the 10 years, but there is no withdrawal charge.
"Total Annual Insurance Charges" include the insurance charges of 1.40%,
plus an additional 0.10%, which is used to represent the $35 annual Account Fee
based on an assumed Contract value of $35,000. The actual impact of the Account
Fee may be greater or less than 0.10%, depending upon the value of your
Contract.
<TABLE>
<CAPTION>
EXAMPLES:
TOTAL EXPENSES
TOTAL ANNUAL TOTAL ANNUAL TOTAL AT END
INSURANCE SERIES ANNUAL 1
SUB-ACCOUNT CHARGES EXPENSES EXPENSES YEAR 10 YEARS
- ---------------------------------------- --------------- --------------- --------- ---- --------
<S> <C> <C> <C> <C> <C>
Bond Series 1.50% 1.03% 2.53% $81 $287
(1.40% + 0.10%)
Capital Appreciation Series 1.50% 0.77% 2.27% $79 $261
(1.40% + 0.10%)
Capital Opportunities Series 1.50% 0.86% 2.36% $79 $270
(1.40% + 0.10%)
Emerging Growth Series 1.50% 0.78% 2.28% $79 $262
(1.40% + 0.10%)
Equity Income Series 1.50% 1.03% 2.53% $81 $287
(1.40% + 0.10%)
Global Asset Allocation Series 1.50% 0.90% 2.40% $80 $274
(1.40% + 0.10%)
Global Governments Series 1.50% 0.88% 2.38% $80 $272
(1.40% + 0.10%)
Global Growth Series 1.50% 1.01% 2.51% $81 $285
(1.40% + 0.10%)
Global Total Return Series 1.50% 0.93% 2.43% $80 $277
(1.40% + 0.10%)
Government Securities Series 1.50% 0.62% 2.12% $77 $245
(1.40% + 0.10%)
High Yield Series 1.50% 0.82% 2.32% $79 $266
(1.40% + 0.10%)
International Growth Series 1.50% 1.32% 2.82% $84 $315
(1.40% + 0.10%)
International Growth and Income Series 1.50% 1.16% 2.66% $82 $299
(1.40% + 0.10%)
Managed Sectors Series 1.50% 0.80% 2.30% $79 $264
(1.40% + 0.10%)
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
EXAMPLES:
TOTAL EXPENSES
TOTAL ANNUAL TOTAL ANNUAL TOTAL AT END
INSURANCE SERIES ANNUAL 1
SUB-ACCOUNT CHARGES EXPENSES EXPENSES YEAR 10 YEARS
- ---------------------------------------- --------------- --------------- --------- ---- --------
<S> <C> <C> <C> <C> <C>
Massachusetts Investors Growth Stock 1.50% 0.97% 2.47% $81 $281
Series (1.40% + 0.10%)
Massachusetts Investors Trust Series 1.50% 0.59% 2.09% $77 $242
(1.40% + 0.10%)
MFS/Foreign & Colonial Emerging Markets 1.50% 1.50% 3.00% $86 $332
Equity Series (1.40% + 0.10%)
Money Market Series 1.50% 0.56% 2.06% $77 $239
(1.40% + 0.10%)
New Discovery Series 1.50% 1.28% 2.78% $83 $311
(1.40% + 0.10%)
Research Series 1.50% 0.76% 2.26% $79 $260
(1.40% + 0.10%)
Research Growth and Income Series 1.50% 0.95% 2.45% $80 $279
(1.40% + 0.10%)
Research International Series 1.50% 1.55% 2.05% $86 $336
(1.40% + 0.10%)
Strategic Income Series 1.50% 1.29% 2.79% $84 $312
(1.40% + 0.10%)
Total Return Series 1.50% 0.70% 2.20% $78 $253
(1.40% + 0.10%)
Utilities Series 1.50% 0.86% 2.36% $79 $270
(1.40% + 0.10%)
</TABLE>
For more detailed information about Contract fees and expenses, please
refer to the fee table and discussion of Contract charges contained in the full
Prospectus which accompanies this Profile.
6. TAXES
Your earnings are not taxed until you take them out of your Contract. If
you take money out, earnings come out first and are taxed as income. If your
Contract is funded with pre-tax or tax deductible dollars (such as with a
pension or IRA contribution) -- we call this a Qualified Contract -- your entire
withdrawal will be taxable. If you are younger than 59 1/2 when you take money
out, you may be charged a 10% federal penalty tax on the earnings. Annuity
payments during the Income Phase are considered in part a return of your
original investment. That portion of each payment is not taxable, except under a
Qualified Contract, in which case the entire payment will be taxable. In all
cases, you should consult with your tax adviser for specific tax information.
7. ACCESS TO YOUR MONEY
You can withdraw money from your Contract at any time during the
Accumulation Phase. You may withdraw a portion of the value of your Contract in
each year without the imposition of the withdrawal charge -- 10% of all payments
you have made in the last 7 years, plus any payment we have held for at least 7
years. All other purchase payments you withdraw will be subject to a withdrawal
charge ranging from 6% to 0%. You may also be required to pay income tax and
possible tax penalties on any money you withdraw.
We do not assess a withdrawal charge upon annuitization or transfers. In
certain circumstances, we will waive the withdrawal charges for a full
withdrawal when you are confined to an eligible nursing home. In addition, there
may be other circumstances under which we may waive the withdrawal charge.
In addition to the withdrawal charge, amounts you withdraw, transfer or
annuitize from the Fixed Account before your Guarantee Period has ended may be
subject to a Market Value Adjustment.
8. PERFORMANCE
If you invest in one or more Sub-Accounts, the value of your Contract will
increase or decrease depending upon the investment performance of the Series you
choose.
4
<PAGE>
The following chart shows total returns for investment in the Sub-Accounts
where the corresponding Series has at least one full calendar year of
operations. The returns reflect all charges and deductions of the Series and
Sub-Accounts and deduction of the Annual Account Fee. They do not reflect
deduction of any withdrawal charges or premium taxes. These charges, if
included, would reduce the performance numbers shown. Past performance is not a
guarantee of future results.
<TABLE>
<CAPTION>
CALENDAR YEAR
---------------------------------------------------------------------------------
SUB-ACCOUNT 1998 1997 1996 1995 1994 1993 1992
---------------------------------------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Bond Series -- -- -- -- -- -- --
Capital Appreciation Series 26.86% 21.33% 19.70% 32.51% (5.03)% 16.28% 11.53%
Capital Opportunities Series 25.13% 25.73% -- -- -- -- --
Emerging Growth Series 31.94% 20.16% 15.38% -- -- -- --
Equity Income Series -- -- -- -- -- -- --
Global Asset Allocation Series 5.00% 9.24% 14.28% 19.85% -- -- --
Global Governments Series 13.80% (2.24)% 3.11% 14.00% (5.91)% 17.16% (1.01)%
Global Growth Series 12.89% 13.63% 11.42% 14.29% 1.40% -- --
Global Total Return Series 16.64% 11.98% 12.58% 16.19% -- -- --
Government Securities Series 7.16% 7.15% 0.11% 15.92% (3.61)% 7.07% 5.14%
High Yield Series (0.86)% 11.55% 10.46% 15.32% (3.68)% 16.01% 13.34%
International Growth Series 0.43% (3.09)% -- -- -- -- --
International Growth and Income Series 19.86% 4.95% 3.33% -- -- -- --
Managed Sectors Series 10.70% 23.80% 15.86% 30.34% (3.38)% 2.52% 4.91%
Massachusetts Investors Growth Stock
Series -- -- -- -- -- -- --
Massachusetts Investors Trust Series 22.05% 30.04% 23.57% 35.44% (2.57)% 6.82% 4.05%
MFS/Foreign & Colonial Emerging Markets
Equity Series (31.00)% 8.75% -- -- -- -- --
Money Market Series 3.50% 3.52% 3.37% 3.90% 2.17% 1.11% 1.81%
New Discovery Series -- -- -- -- -- -- --
Research Series 21.85% 19.06% 22.00% 35.44% -- -- --
Research Growth and Income Series 20.41% -- -- -- -- -- --
Research International Series -- -- -- -- -- -- --
Strategic Income Series -- -- -- -- -- -- --
Total Return Series 10.13% 20.18% 12.38% 24.93% (3.71)% 11.72% 6.77%
Utilities Series 15.89% 30.80% 18.57% 30.48% (6.36)% -- --
<CAPTION>
SUB-ACCOUNT 1991 1990 1989
---------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Bond Series -- -- --
Capital Appreciation Series 38.89% (11.02)% 45.06%
Capital Opportunities Series -- -- --
Emerging Growth Series -- -- --
Equity Income Series -- -- --
Global Asset Allocation Series -- -- --
Global Governments Series 13.10% 11.67% 8.31%
Global Growth Series -- -- --
Global Total Return Series -- -- --
Government Securities Series 14.17% 7.26% 11.19%
High Yield Series 45.49% (15.65)% 2.41%
International Growth Series -- -- --
International Growth and Income Series -- -- --
Managed Sectors Series 59.67% (11.80)% 43.27%
Massachusetts Investors Growth Stock
Series -- -- --
Massachusetts Investors Trust Series 34.87% (4.86)% 33.89%
MFS/Foreign & Colonial Emerging Markets
Equity Series -- -- --
Money Market Series 4.23% 6.26% 7.31%
New Discovery Series -- -- --
Research Series -- -- --
Research Growth and Income Series -- -- --
Research International Series -- -- --
Strategic Income Series -- -- --
Total Return Series 19.87% 1.15% 15.80%
Utilities Series -- -- --
</TABLE>
9. DEATH BENEFIT
If you die before the Contract reaches the Income Phase, the beneficiary
will receive a death benefit. To calculate the death benefit, we use a "Death
Benefit Date", which is the earliest date we have both due proof of death and a
written request specifying the manner of payment.
If you were 85 or younger when we issued your Contract, the death benefit
is the greatest of:
(1) the value of the Contract on the Death Benefit Date;
(2) the amount we would pay in the event of a full surrender of the
Contract on the Death Benefit Date;
(3) the value of the Contract on the most recent 7 year anniversary of the
Contract, plus any purchase payments made and adjusted for any partial
withdrawals and charges made after that anniversary;
(4) your highest Contract Value on any Account Anniversary before your
81st birthday, adjusted for subsequent purchase payments and partial
withdrawals and charges made between that Account Anniversary and the
Death Benefit Date; and
(5) your total Purchase Payments, plus interest on Purchase Payments
allocated to and transfers to the Variable Account -- while they
remain in the Variable Account -- at 5% per year until the first day
of the month following your 80th birthday, or until the Purchase
Payment
5
<PAGE>
or amount transferred has doubled in amount, whichever is earlier;
this amount is adjusted for partial withdrawals.
If you were 86 or older when we issued your Contract, the death benefit is
equal to the amount set forth in (2) above, in this Section 9.
10. OTHER INFORMATION
FREE LOOK. Depending upon applicable state law, if you cancel your
Contract within 10 days after receiving it we will send you the value of your
Contract as of the day we received your cancellation request (this may be more
or less than the original purchase payment) and we will not deduct a withdrawal
charge. However, if applicable state or federal law requires, we will refund the
full amount of any purchase payment(s) we receive and the "free look" period may
be greater than 10 days.
NO PROBATE. In most cases, when you die, the beneficiary will receive the
death benefit without going through probate. However, avoiding probate does not
mean that the beneficiary will not have tax liability as a result of receiving
the death benefit.
WHO SHOULD PURCHASE A CONTRACT? The Contract is designed for those seeking
long-term tax deferred accumulation of assets and annuity features, generally
for retirement or other long-term purposes. The tax-deferred feature is most
attractive to purchasers in high federal and state income tax brackets. You
should note that qualified retirement investments automatically provide tax
deferral regardless of whether the underlying contract is an annuity. You should
not buy a Contract if you are looking for a short-term investment or if you
cannot risk a decrease in the value of your investment.
CONFIRMATIONS AND QUARTERLY STATEMENTS. You will receive a confirmation of
each transaction within your Contract. On a quarterly basis, you will receive a
complete statement of your transactions over the past quarter and a summary of
your account values during that period.
ADDITIONAL FEATURES. The MFS Regatta Platinum Annuity offers the following
additional convenient features, which you may choose at no extra charge.
Dollar Cost Averaging -- This program lets you invest gradually in up to
12 Sub-Accounts.
Asset Allocation -- One or more asset allocation programs may be available
in connection with the Contract.
Systematic Withdrawal and Interest Out Program -- These programs allow you
to receive quarterly, semi-annual or annual payments during the Accumulation
Phase.
Portfolio Rebalancing Programs -- Under this program, we automatically
reallocate your investments in the Sub-Accounts to maintain the proportions you
select. You can elect rebalancing on a quarterly, semi-annual or annual basis.
Secured Future Program -- This program guarantees the return of your
Purchase Payment, and also allows you to allocate a portion of your investment
to one or more variable investment options.
11. INQUIRIES
If you would like more information about buying a Contract, please contact
your broker or registered representative. If you have any other questions,
please contact us at:
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
ANNUITY SERVICE MAILING ADDRESS
C/O RETIREMENT PRODUCTS AND SERVICES
P.O. BOX 1024
BOSTON, MASSACHUSETTS 02103
TEL: TOLL FREE (800) 752-7215
IN MASSACHUSETTS (617) 348-9600
6
<PAGE>
PROSPECTUS
MAY 1, 1999
MFS REGATTA PLATINUM
Sun Life Assurance Company of Canada (U.S.) and Sun Life of Canada (U.S.)
Variable Account F offer the flexible payment deferred annuity contracts and
certificates described in this Prospectus to groups and individuals.
You may choose among 25 variable investment options and a range of fixed
options. The variable options are Sub-Accounts in the Variable Account. Each
Sub-Account invests in one of the following series of the MFS/Sun Life Series
Trust (the "Series Fund"), a mutual fund advised by our affiliate, Massachusetts
Financial Services Company:
<TABLE>
<S> <C>
Bond Series Managed Sectors Series
Capital Appreciation Series Massachusetts Investors Growth Stock Series
Capital Opportunities Series Massachusetts Investors Trust Series
Emerging Growth Series MFS/Foreign & Colonial Emerging Markets Equity Series
Equity Income Series Money Market Series
Global Asset Allocation Series New Discovery Series
Global Government Series Research Series
Global Growth Series Research Growth and Income Series
Global Total Return Series Research International Series
Government Securities Series Strategic Income Series
High Yield Series Total Return Series
International Growth Series Utilities Series
International Growth and Income
Series
</TABLE>
The fixed account options are available for specified time periods, called
Guarantee Periods, and pay interest at a guaranteed rate for each period.
THIS PROSPECTUS MUST BE ACCOMPANIED BY A CURRENT PROSPECTUS FOR THE SERIES
FUND. PLEASE READ THIS PROSPECTUS AND THE SERIES FUND PROSPECTUS CAREFULLY
BEFORE INVESTING AND KEEP THEM FOR FUTURE REFERENCE. THEY CONTAIN IMPORTANT
INFORMATION ABOUT THE MFS REGATTA PLATINUM ANNUITY AND THE SERIES FUND.
We have filed a Statement of Additional Information dated May 1, 1999 (the
"SAI") with the Securities and Exchange Commission (the "SEC"), which is
incorporated by reference in this Prospectus. The table of contents for the SAI
is on page 75 of this Prospectus. You may obtain a copy without charge by
writing to our Annuity Service Mailing Address or by telephoning (800) 752-7215
or (617) 348-9600. In addition, the SEC maintains a website (http://www.sec.gov)
that contains the SAI, material incorporated by reference, and other information
regarding companies that file with the SEC.
THE CONTRACTS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY,
ANY BANK, AND ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY.
THE SEC HAS NOT APPROVED OR DISAPPROVED THESE SECURITIES OR PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
ANY REFERENCE IN THIS PROSPECTUS TO RECEIPT BY US MEANS RECEIPT AT THE FOLLOWING
ADDRESS:
ANNUITY SERVICE MAILING ADDRESS, C/O SUN LIFE ASSURANCE COMPANY OF CANADA
(U.S.)
RETIREMENT PRODUCTS AND SERVICES, P.O. BOX 1024, BOSTON, MASSACHUSETTS
02103
1
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Special Terms
Expense Summary
Summary of Contract Expenses
Series Fund Annual Expenses
Examples
Condensed Financial Information
The MFS Regatta Platinum Annuity
Communicating To Us About Your Contract
Sun Life Assurance Company of Canada (U.S.)
The Variable Account
Variable Account Options: The MFS/Sun Life Series Trust
The Fixed Account
The Fixed Account Options: The Guarantee Periods
The Accumulation Phase
Issuing Your Contract
Amount and Frequency of Purchase Payments
Allocation of Net Purchase Payments
Your Account
Your Account Value
Variable Account Value
Fixed Account Value
Transfer Privilege
Waivers; Reduced Charges; Credits; Bonus Guaranteed Interest Rates
Optional Programs
Withdrawals, Withdrawal Charge and Market Value Adjustment
Cash Withdrawals
Withdrawal Charge
Market Value Adjustment
Contract Charges
Account Fee
Administrative Expense Charge
Mortality and Expense Risk Charge
Premium Taxes
Series Fund Expenses
Modification in the Case of Group Contracts
Death Benefit
Amount of Death Benefit
Method of Paying Death Benefit
Non-Qualified Contracts
Selection and Change of Beneficiary
Payment of Death Benefit
Due Proof of Death
The Income Phase -- Annuity Provisions
Selection of the Annuitant or Co-Annuitant
Selection of the Annuity Commencement Date
Annuity Options
Selection of Annuity Option
Amount of Annuity Payments
Exchange of Variable Annuity Units
Account Fee
Annuity Payment Rates
Annuity Options as Method of Payment for Death Benefit
</TABLE>
2
<PAGE>
<TABLE>
<S> <C>
Other Contract Provisions
Exercise of Contract Rights
Change of Ownership
Voting of Series Fund Shares
Periodic Reports
Substitution of Securities
Change in Operation of Variable Account
Splitting Units
Modification
Discontinuance of New Participants
Reservation of Rights
Right to Return
Federal Tax Status
Introduction
Deductibility of Purchase Payments
Pre-Distribution Taxation of Contracts
Distributions and Withdrawals from Non-Qualified Contracts
Distribution and Withdrawals from Qualified Contracts
Withholding
Purchase of Immediate Annuity Contract and Deferred Annuity Contract
Investment Diversification and Control
Tax Treatment of the Company and the Variable Account
Qualified Retirement Plans
Pension and Profit-Sharing Plans
Tax-Sheltered Annuities
Individual Retirement Accounts
Roth IRAs
Administration of the Contracts
Distribution of the Contracts
Performance Information
Available Information
Incorporation of Certain Documents by Reference
Additional Information About the Company
Business of the Company
Selected Financial Data
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Capital Resources
Demutualization
Year 2000 Compliance
Sale of Subsidiary
Quantitative and Qualitative Disclosures About Market Risk
Reinsurance
Reserves
Investments
Competition
Employees
Properties
State Regulation
Legal Proceedings
Accountants
Financial Statements
Table of Contents of Statement of Additional Information
Appendix A -- Glossary
Appendix B -- Condensed Financial Information-- Accumulation Unit Values
Appendix C -- Withdrawals, Withdrawal Charges and the Market Value Adjustment
</TABLE>
3
<PAGE>
SPECIAL TERMS
Your Contract is a legal document that uses a number of specially defined
terms. We explain most of the terms that we use in this Prospectus in the
context where they arise, and some are self-explanatory. In addition, for
convenient reference, we have compiled a list of these terms in the Glossary
included at the back of this Prospectus as Appendix A. If, while you are reading
this Prospectus, you come across a term that you do not understand, please refer
to the Glossary for an explanation.
EXPENSE SUMMARY
The purpose of the following table is to help you understand the costs and
expenses that you will bear directly and indirectly under a Contract WHEN YOU
ALLOCATE MONEY TO THE VARIABLE ACCOUNT. The table reflects expenses of the
Variable Account as well as of each Series of the Series Fund. The table should
be considered together with the narrative provided under the heading "Contract
Fees" in this Prospectus, and with the Series Fund's prospectus. In addition to
the expenses listed below, we may deduct premium taxes.
SUMMARY OF CONTRACT EXPENSES
<TABLE>
<S> <C>
TRANSACTION EXPENSES
Sales Load Imposed on Purchase Payments............................................ $ 0
Deferred Sales Load (as a percentage of Purchase Payments withdrawn) (1)
Number of Account Years Purchase Payment in Account
0-1............................................................................ 6%
2-3............................................................................ 5%
4-5............................................................................ 4%
6.............................................................................. 3%
7 or more...................................................................... 0%
Transfer Fee (2)................................................................... $ 0
ANNUAL ACCOUNT FEE per Contract or Certificate (3) $ 35
VARIABLE ACCOUNT ANNUAL EXPENSES (as a percentage of average Variable Account
assets)
Mortality and Expense Risk Charge................................................ 1.25%
Administrative Expense Charge.................................................... 0.15%
Other Fees and Expenses of the Variable Account.................................. 0.00%
-----
Total Variable Account Annual Expenses............................................. 1.40%
</TABLE>
- ------------------------
(1) A portion of your Account may be withdrawn each year without imposition of
any withdrawal charge, and after a Purchase Payment has been in your Account
for 7 Account Years it may be withdrawn free of the withdrawal charge.
(2) A Market Value Adjustment may be imposed on amounts transferred from or
within the Fixed Account.
(3) The Annual Account Fee is the lesser of $35 and 2% of your Account Value in
Account Years 1 through 5; thereafter, the fee may be changed annually, but
it may not exceed the lesser of $50 and 2% of your Account Value.
4
<PAGE>
SERIES FUND ANNUAL EXPENSES (1)
(AS A PERCENTAGE OF SERIES FUND NET ASSETS)
<TABLE>
<CAPTION>
OTHER TOTAL FUND
MANAGEMENT EXPENSES(2) EXPENSES
FEES (AFTER REIMBURSEMENT) (AFTER REIMBURSEMENT)
--------------- ------------------------ ------------------------
<S> <C> <C> <C>
Bond Series....................................... 0.60% 0.43% 1.03%(3)
Capital Appreciation Series....................... 0.73% 0.04% 0.77%
Capital Opportunities Series...................... 0.75% 0.11% 0.86%
Emerging Growth Series............................ 0.72% 0.06% 0.78%
Equity Income Series.............................. 0.75% 0.28% 1.03%(3)
Global Asset Allocation Series.................... 0.75% 0.15% 0.90%
Global Governments Series......................... 0.75% 0.13% 0.88%
Global Growth Series.............................. 0.90% 0.11% 1.01%
Global Total Return Series........................ 0.75% 0.18% 0.93%
Government Securities Series...................... 0.55% 0.07% 0.62%
High Yield Series................................. 0.75% 0.07% 0.82%
International Growth Series....................... 0.98% 0.34% 1.32%
International Growth and Income Series............ 0.98% 0.18% 1.16%
Managed Sectors Series............................ 0.74% 0.06% 0.80%
Massachusetts Investors Growth Stock Series....... 0.75% 0.22% 0.97%
Massachusetts Investors Trust Series.............. 0.55% 0.04% 0.59%
MFS/Foreign & Colonial Emerging Markets Equity
Series........................................... 1.25% 0.25% 1.50%
Money Market Series............................... 0.50% 0.06% 0.56%
New Discovery Series.............................. 0.90% 0.38% 1.28%(3)
Research Series................................... 0.70% 0.06% 0.76%
Research Growth and Income Series................. 0.75% 0.20% 0.95%
Research International Series..................... 1.00% 2.55% 1.55%(3)
Strategic Income Series........................... 0.75% 0.54% 1.29%(3)
Total Return Series............................... 0.65% 0.05% 0.70%
Utilities Series.................................. 0.75% 0.11% 0.86%
</TABLE>
- --------------------------
(1) The information relating to Series Fund expenses was provided by the Series
Fund and we have not independently verified it. You should consult the
Series Fund prospectus for more information about Series Fund expenses
(2) Each Series has an expense offset arrangement which reduces the Series'
custodian fee based upon the amount of cash maintained by the Series with
its custodian and dividend disbursing agent, and may enter into such other
arrangements and directed brokerage arrangements (which would also have the
effect of reducing the series' expenses). Any such fee reductions are not
reflected under "Other Expenses."
(3) "Other Expenses" and "Total Fund Expenses" are based on actual expenses for
the fiscal year ended December 31, 1998, net of any expense reimbursement
and/or fee waiver. MFS has agreed to bear the expenses of certain of the
Series (excluding management fees, taxes, extraordinary expenses and
brokerage and transaction costs) in excess of the following annual
percentage of such Series' average daily net assets:
<TABLE>
<S> <C>
Bond Series..................................................... 0.40%
Equity Income Series............................................ 0.25%
New Discovery Series............................................ 0.35%
Research International Series................................... 0.50%
Strategic Income Series......................................... 0.50%
</TABLE>
Without taking into account the fee waiver and/or expense reimbursement,
expenses for these Series would have been as follows: Bond Series -- Other
Expenses 0.47% and Total Fund Expenses 1.07%; Equity Income Series -- Other
Expenses 0.76% and Total Fund Expenses 1.51%; New Discovery Series -- Other
Expenses 0.70% and Total Fund Expenses 1.60%; Research International Series
-- Other Expenses 2.86% and Total Fund Expenses 3.86%; and Strategic Income
Series -- Other Expenses 0.67% and Total Fund Expenses 1.42%.
These arrangements will remain in effect until at least May 1, 2000, absent
an earlier modification by the Series' Board of Trustees.
5
<PAGE>
EXAMPLES
If you surrender your Contract at the end of the applicable time period,
you would pay the following expenses on a $1,000 investment, assuming a 5%
annual return:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Bond Series............................................................... $ 81 $ 118 $ 160 $ 287
Capital Appreciation Series............................................... $ 79 $ 110 $ 147 $ 261
Capital Opportunities Series.............................................. $ 79 $ 113 $ 152 $ 270
Emerging Growth Series.................................................... $ 79 $ 110 $ 148 $ 262
Equity Income Series...................................................... $ 81 $ 118 $ 160 $ 287
Global Asset Allocation Series............................................ $ 80 $ 114 $ 154 $ 274
Global Governments Series................................................. $ 80 $ 113 $ 153 $ 272
Global Growth Series...................................................... $ 81 $ 117 $ 159 $ 285
Global Total Return Series................................................ $ 80 $ 115 $ 155 $ 277
Government Securities Series.............................................. $ 77 $ 106 $ 140 $ 245
High Yield Series......................................................... $ 79 $ 112 $ 150 $ 266
International Growth Series............................................... $ 84 $ 126 $ 173 $ 315
International Growth and Income Series.................................... $ 82 $ 121 $ 166 $ 299
Managed Sectors Series.................................................... $ 79 $ 111 $ 149 $ 264
Massachusetts Investors Growth Stock Series............................... $ 81 $ 116 $ 157 $ 281
Massachusetts Investors Trust Series...................................... $ 77 $ 105 $ 139 $ 242
MFS/Foreign & Colonial Emerging Markets Equity Series..................... $ 86 $ 131 $ 182 $ 332
Money Market Series....................................................... $ 77 $ 104 $ 137 $ 239
New Discovery Series...................................................... $ 83 $ 125 $ 172 $ 311
Research Series........................................................... $ 79 $ 110 $ 147 $ 260
Research Growth and Income Series......................................... $ 80 $ 115 $ 156 $ 279
Research International Series............................................. $ 86 $ 132 $ 184 $ 336
Strategic Income Series................................................... $ 84 $ 125 $ 172 $ 312
Total Return Series....................................................... $ 78 $ 108 $ 144 $ 253
Utilities Series.......................................................... $ 79 $ 113 $ 152 $ 270
</TABLE>
If you do NOT surrender your Contract, or if you annuitize at the end of
the applicable time period, you would pay the following expenses on a $1,000
investment, assuming a 5% annual return:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Bond Series............................................................... $ 26 $ 79 $ 135 $ 287
Capital Appreciation Series............................................... $ 23 $ 71 $ 122 $ 261
Capital Opportunities Series.............................................. $ 24 $ 74 $ 126 $ 270
Emerging Growth Series.................................................... $ 23 $ 71 $ 122 $ 262
Equity Income Series...................................................... $ 26 $ 79 $ 135 $ 287
Global Asset Allocation Series............................................ $ 24 $ 75 $ 128 $ 274
Global Governments Series................................................. $ 24 $ 74 $ 127 $ 272
Global Growth Series...................................................... $ 25 $ 78 $ 134 $ 285
Global Total Return Series................................................ $ 25 $ 76 $ 130 $ 277
Government Securities Series.............................................. $ 22 $ 66 $ 114 $ 245
High Yield Series......................................................... $ 24 $ 72 $ 124 $ 266
International Growth Series............................................... $ 29 $ 87 $ 149 $ 315
International Growth and Income Series.................................... $ 27 $ 83 $ 141 $ 299
Managed Sectors Series.................................................... $ 23 $ 72 $ 123 $ 264
Massachusetts Investors Growth Stock Series............................... $ 25 $ 77 $ 132 $ 281
Massachusetts Investors Trust Series...................................... $ 21 $ 65 $ 112 $ 242
MFS/Foreign & Colonial Emerging Markets Equity Series..................... $ 30 $ 93 $ 158 $ 332
Money Market Series....................................................... $ 21 $ 65 $ 111 $ 239
New Discovery Series...................................................... $ 28 $ 86 $ 147 $ 311
Research Series........................................................... $ 23 $ 71 $ 121 $ 260
Research Growth and Income Series......................................... $ 25 $ 76 $ 131 $ 279
Research International Series............................................. $ 31 $ 94 $ 160 $ 336
Strategic Income Series................................................... $ 28 $ 87 $ 147 $ 312
Total Return Series....................................................... $ 22 $ 69 $ 118 $ 253
Utilities Series.......................................................... $ 24 $ 74 $ 126 $ 270
</TABLE>
THE EXAMPLES SHOULD NOT BE CONSIDERED TO BE REPRESENTATIONS OF PAST OR
FUTURE EXPENSES, AND ACTUAL EXPENSES MAY BE GREATER OR LOWER THAN THOSE SHOWN.
6
<PAGE>
CONDENSED FINANCIAL INFORMATION
Historical information about the value of the units we use to measure the
variable portion of your Contract ("Variable Accumulation Units") is included in
the back of this Prospectus as Appendix B.
THE MFS REGATTA PLATINUM ANNUITY
Sun Life Assurance Company of Canada (U.S.) (the "Company", "we" or "us")
and Sun Life of Canada (U.S.) Variable Account F (the "Variable Account") offer
the MFS Regatta Platinum Annuity to groups and individuals for use in connection
with their retirement plans. The Contracts are available on a group basis and,
in certain states, may be available on an individual basis. We issue an
Individual Contract directly to the individual owner of the Contract. We issue a
Group Contract to the Owner covering all individuals participating under the
Group Contract. Each individual receives a Certificate that evidences his or her
participation under the Group Contract.
In this Prospectus, unless we state otherwise, we refer to both the owners
of Individual Contracts and participating individuals under Group Contracts as
"Participants" and we address all those Participants as "you"; we use the term
"Contracts" to include Individual Contracts, Group Contracts and Certificates
issued under Group Contracts. For the purpose of determining benefits under both
Individual Contracts and Group Contracts, we establish an Account for each
Participant, which we will refer to as "your" Account or a "Participant
Account."
The Contract provides a number of important benefits for your retirement
planning. It has an Accumulation Phase, during which you make payments under the
Contract and allocate them to one or more Variable Account or Fixed Account
options, and an Income Phase, during which we make payments based on the amount
you have accumulated. The Contract provides tax deferral, so that you do not pay
taxes on your earnings under the Contract until you withdraw them. It provides a
death benefit if you die during the Accumulation Phase. Finally, if you so
elect, during the Income Phase we will make payments to you or someone else for
life or for another period that you choose.
You choose these benefits on a variable or fixed basis or a combination of
both. When you choose variable investment options or a Variable Annuity option,
your benefits will be responsive to changes in the economic environment,
including inflationary forces and changes in rates of return available from
different types of investments. With these options, you assume all investment
risk under the Contract. When you choose a Guarantee Period in our Fixed Account
or a Fixed Annuity option, we assume the investment risk, except in the case of
early withdrawals, where you bear the risk of unfavorable interest rate changes.
You also bear the risk that the interest rates we will offer in the future and
the rates we will use in determining your Fixed Annuity may not exceed our
minimum guaranteed rate, which is 3% per year, compounded annually.
The Contracts are designed for use in connection with retirement and
deferred compensation plans, some of which qualify for favorable federal income
tax treatment under Sections 401, 403, 408 or 408A of the Internal Revenue Code.
The Contracts are also designed so that they may be used in connection with
certain non-tax-qualified retirement plans, such as payroll savings plans and
such other groups (trusteed or nontrusteed) as may be eligible under applicable
law. We refer to Contracts used with plans that receive favorable tax treatment
as "Qualified Contracts," and all others as "Non-Qualified Contracts."
COMMUNICATING TO US ABOUT YOUR CONTRACT
All materials sent to us, including Purchase Payments, must be sent to our
Annuity Service Mailing Address set forth on the first page of this Prospectus.
For all telephone communications, you must call (800) 752-7215 or (617)
348-9600.
Unless this Prospectus states differently, we will consider all materials
sent to us and all telephone communications to be received on the date we
actually receive them at the Annuity Service Mailing Address. However, we will
consider Purchase Payments, withdrawal requests and transfer
7
<PAGE>
instructions to be received on the next Business Day if we receive them (1) on a
day that is not a Business Day or (2) after 4:00 p.m., Eastern Time.
When we specify that notice to us must be in writing, we reserve the
right, in our sole discretion, to accept notice in another form.
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
We are a stock life insurance company incorporated under the laws of
Delaware on January 12, 1970. We do business in 48 states, the District of
Columbia, and Puerto Rico, and we have an insurance company subsidiary that does
business in New York. Our Executive Office mailing address is One Sun Life
Executive Park, Wellesley Hills, Massachusetts 02481.
We are an indirect wholly-owned subsidiary of Sun Life Assurance Company
of Canada ("Sun Life (Canada)"). Sun Life (Canada) is a mutual life insurance
company incorporated pursuant to Act of Parliament of Canada in 1865 and
currently transacts business in all of the Canadian provinces and territories,
all U.S. states (except New York), the District of Columbia, Puerto Rico, the
Virgin Islands, Great Britain, Ireland, Hong Kong, Bermuda and the Philippines.
THE VARIABLE ACCOUNT
We established the Variable Account as a separate account on July 13,
1989, pursuant to a resolution of our Board of Directors. Under Delaware
insurance law and the Contract, the income, gains or losses of the Variable
Account are credited to or charged against the assets of the Variable Account
without regard to the other income, gains, or losses of the Company. These
assets are held in relation to the Contracts described in this Prospectus and
other variable annuity contracts that provide benefits that vary in accordance
with the investment performance of the Variable Account. Although the assets
maintained in the Variable Account will not be charged with any liabilities
arising out of any other business we conduct, all obligations arising under the
Contracts, including the promise to make annuity payments, are general corporate
obligations of the Company.
The assets of the Variable Account are divided into Sub-Accounts. Each
Sub-Account invests exclusively in shares of a specific Series of the MFS/Sun
Life Series Trust (the "Series Fund"). All amounts allocated to the Variable
Account will be used to purchase Series Fund shares as designated by you at
their net asset value. Any and all distributions made by the Series Fund with
respect to the shares held by the Variable Account will be reinvested to
purchase additional shares at their net asset value. Deductions from the
Variable Account for cash withdrawals, annuity payments, death benefits, Account
Fees, contract charges against the assets of the Variable Account for the
assumption of mortality and expense risks, administrative expenses and any
applicable taxes will, in effect, be made by redeeming the number of Series Fund
shares at their net asset value equal in total value to the amount to be
deducted. The Variable Account will be fully invested in Series Fund shares at
all times.
VARIABLE ACCOUNT OPTIONS:
THE MFS/SUN LIFE SERIES TRUST
The MFS/Sun Life Series Trust (the "Series Fund") is an open-end
management investment company registered under the Investment Company Act of
1940. Our affiliate, Massachusetts Financial Services Company ("MFS"), serves as
the investment adviser to the Series Fund.
The Series Fund is composed of 26 independent portfolios of securities,
each of which has separate investment objectives and policies. Shares of the
Series Fund are issued in 26 Series, each corresponding to one of the
portfolios. The Contracts provide for investment by the Sub-Accounts in shares
of the 25 Series of the Series Fund described below. Additional portfolios may
be added to the Series Fund which may or may not be available for investment by
the Variable Account.
BOND SERIES will primarily seek as high a level of current income as is
believed to be consistent with prudent investment risk; its secondary
objective is to seek to protect shareholders' capital.
8
<PAGE>
CAPITAL APPRECIATION SERIES will seek to maximize capital appreciation by
investing in securities of all types, with major emphasis on common stocks.
CAPITAL OPPORTUNITIES SERIES will seek capital appreciation.
EMERGING GROWTH SERIES will seek long-term growth of capital.
EQUITY INCOME SERIES will primarily seek reasonable income by investing
mainly in income producing securities; its secondary objective is to seek
capital appreciation.
GLOBAL ASSET ALLOCATION SERIES (FORMERLY, THE WORLD ASSET ALLOCATION
SERIES) will seek total return over the long term through investments in
equity and fixed income securities and will also seek to have low
volatility of share price (I.E., net asset value per share) and reduced
risk (compared to an aggressive equity/fixed income portfolio).
GLOBAL GOVERNMENTS SERIES (FORMERLY, THE WORLD GLOBAL GOVERNMENTS SERIES)
will seek to provide moderate current income, preservation of capital and
growth of capital by investing in debt obligations that are issued or
guaranteed as to principal and interest by either (i) the U.S. Government,
its agencies, authorities, or instrumentalities, or (ii) the governments of
foreign countries (to the extent that the Series' adviser believes that the
higher yields available from foreign government securities are sufficient
to justify the risks of investing in these securities).
GLOBAL GROWTH SERIES (FORMERLY, THE WORLD GROWTH SERIES) will seek capital
appreciation by investing in securities of companies worldwide growing at
rates expected to be well above the growth rate of the overall U.S.
economy.
GLOBAL TOTAL RETURN SERIES (FORMERLY, THE WORLD TOTAL RETURN SERIES) will
seek total return by investing in securities which will provide above
average current income (compared to a portfolio invested entirely in equity
securities) and opportunities for long-term growth of capital and income.
GOVERNMENT SECURITIES SERIES will seek current income and preservation of
capital by investing in U.S. Government and U.S. Government-related
securities.
HIGH YIELD SERIES will seek high current income and capital appreciation by
investing primarily in certain lower rated or unrated securities (possibly
with equity features) of U.S. and foreign issuers (also known as "junk
bonds").
INTERNATIONAL GROWTH SERIES will seek capital appreciation.
INTERNATIONAL GROWTH AND INCOME SERIES will seek capital appreciation and
current income.
MANAGED SECTORS SERIES will seek capital appreciation by varying the
weighting of its portfolio among 13 industry sectors.
MASSACHUSETTS INVESTORS GROWTH STOCK SERIES will seek to provide long-term
growth of capital and future income rather than current income.
MASSACHUSETTS INVESTORS TRUST SERIES (FORMERLY, THE CONSERVATIVE GROWTH
SERIES) will seek long-term growth of capital and future income while
providing more current dividend income than is normally obtainable from a
portfolio of only growth stocks.
MFS/FOREIGN & COLONIAL EMERGING MARKETS EQUITY SERIES will seek capital
appreciation.
MONEY MARKET SERIES will seek maximum current income to the extent
consistent with stability of principal by investing exclusively in money
market instruments maturing in less than 13 months.
NEW DISCOVERY SERIES will seek capital appreciation.
RESEARCH SERIES will seek to provide long-term growth of capital and future
income.
9
<PAGE>
RESEARCH GROWTH AND INCOME SERIES will seek to provide long-term growth of
capital, current income and growth of income.
RESEARCH INTERNATIONAL SERIES will seek capital appreciation.
STRATEGIC INCOME SERIES will seek to provide high current income by
investing in fixed income securities and will seek to take advantage of
opportunities to realize significant capital appreciation while maintaining
a high level of current income.
TOTAL RETURN SERIES will seek primarily to obtain above-average income
(compared to a portfolio entirely invested in equity securities) consistent
with prudent employment of capital; its secondary objective is to take
advantage of opportunities for growth of capital and income since many
securities offering a better than average yield may also possess growth
potential.
UTILITIES SERIES will seek capital growth and current income (income above
that available from a portfolio invested entirely in equity securities) by
investing, under normal market conditions, at least 65% of its assets in
equity and debt securities of both domestic and foreign companies in the
utilities industry.
The Series Fund pays fees to MFS for its services pursuant to investment
advisory agreements. MFS also serves as investment adviser to each of the funds
in the MFS Family of Funds, and to certain other investment companies
established by MFS and/or us. MFS Institutional Advisers, Inc., a wholly-owned
subsidiary of MFS, provides investment advice to substantial private clients.
MFS and its predecessor organizations have a history of money management dating
from 1924. MFS operates as an autonomous organization and the obligation of
performance with respect to the investment advisory and underwriting agreements
(including supervision of the sub-advisers noted below) is solely that of MFS.
We undertake no obligation in this regard.
MFS has retained Foreign & Colonial Management Limited ("FCM") and its
subsidiary, Foreign & Colonial Emerging Markets Limited ("FCEM"), as
sub-advisers to manage the MFS/Foreign & Colonial Emerging Markets Series and to
manage the assets of the Global Growth Series.
MFS may serve as the investment adviser to other mutual funds which have
similar investment goals and principal investment policies and risks as the
Series, and which may be managed by a Series' portfolio managers(s). While a
Series may have many similarities to these other funds, its investment
performance will differ from their investment performance. This is due to a
number of differences between a Series and these similar products, including
differences in sales charges, expense ratios and cash flows.
The Series Fund also offers its shares to other separate accounts
established by the Company and our New York subsidiary in connection with
variable annuity and variable life insurance contracts. Although we do not
anticipate any disadvantages to this arrangement, there is a possibility that a
material conflict may arise between the interests of the Variable Account and
one or more of the other separate accounts investing in the Series Fund. A
conflict may occur due to differences in tax laws affecting the operations of
variable life and variable annuity separate accounts, or some other reason. We
and the Series Fund's Board of Trustees will monitor events for such conflicts,
and, in the event of a conflict, we will take steps necessary to remedy the
conflict, including withdrawal of the Variable Account from participation in the
Series which is involved in the conflict or substitution of shares of other
Series or other mutual funds.
MORE COMPREHENSIVE INFORMATION ABOUT THE SERIES FUND, AND THE MANAGEMENT,
INVESTMENT OBJECTIVES, POLICIES, RESTRICTIONS, EXPENSES AND POTENTIAL RISKS OF
EACH SERIES MAY BE FOUND IN THE ACCOMPANYING CURRENT PROSPECTUS OF THE SERIES
FUND. YOU SHOULD READ THE SERIES FUND PROSPECTUS CAREFULLY BEFORE INVESTING. THE
SERIES FUND'S STATEMENT OF ADDITIONAL INFORMATION IS AVAILABLE BY CALLING
1-800-752-7215.
10
<PAGE>
THE FIXED ACCOUNT
The Fixed Account is made up of all the general assets of the Company
other than those allocated to any separate account. Amounts you allocate to
Guarantee Periods become part of the Fixed Account, and are available to fund
the claims of all classes of our customers, including claims for benefits under
the Contracts.
We will invest the assets of the Fixed Account in those assets we choose
that are allowed by applicable state insurance laws. In general, these laws
permit investments, within specified limits and subject to certain
qualifications, in federal, state and municipal obligations, corporate bonds,
preferred and common stocks, real estate mortgages, real estate and certain
other investments. We intend to invest primarily in investment-grade fixed
income securities (i.e. rated by a nationally recognized rating service within
the four highest grades) or instruments we believe are of comparable quality. We
are not obligated to invest amounts allocated to the Fixed Account according to
any particular strategy, except as may be required by applicable state insurance
laws. You will not have a direct or indirect interest in the Fixed Account
investments.
THE FIXED ACCOUNT OPTIONS:
THE GUARANTEE PERIODS
You may elect one or more Guarantee Period(s) from those we make available
from time to time. We publish Guaranteed Interest Rates for each Guarantee
Period offered. We may change the Guaranteed Interest Rates we offer from time
to time, but no Guaranteed Interest Rate will ever be less than 3% per year,
compounded annually. Also, once we have accepted your allocation to a particular
Guarantee Period, we promise that the Guaranteed Interest Rate applicable to
that allocation will not change for the duration of the Guarantee Period.
We determine Guaranteed Interest Rates in our discretion. We do not have a
specific formula for establishing the rates for different Guarantee Periods. Our
determination will be influenced by the interest rates on fixed income
investments in which we may invest with amounts allocated to the Guarantee
Periods. We will also consider other factors in determining these rates,
including regulatory and tax requirements, sales commissions and administrative
expenses borne by us, general economic trends and competitive factors. We cannot
predict the level of future interest rates.
We may from time to time in our discretion offer interest rate specials
for new Purchase Payments that are higher than the rates we are then offering
for renewals on transfers.
Early withdrawals from your allocation to a Guarantee Period, including
cash withdrawals, transfers, and commencement of an annuity, may be subject to a
Market Value Adjustment, which could decrease or increase the value of your
Account. See "Cash Withdrawals, Withdrawal Charge, and Market Value Adjustment."
THE ACCUMULATION PHASE
During the Accumulation Phase of your Contract, you make payments into
your Account, and your earnings accumulate on a tax-deferred basis. The
Accumulation Phase begins with our acceptance of your first Purchase Payment and
ends the Business Day before your Annuity Commencement Date. The Accumulation
Phase will end sooner if you surrender your Contract or die before the Annuity
Commencement Date.
ISSUING YOUR CONTRACT
When you purchase a Contract, a completed Application and the initial
Purchase Payment are sent to us for acceptance. When we accept an Individual
Contract, we issue the Contract to you. When we accept a Group Contract, we
issue the Contract to the Owner; we issue a Certificate to you as a Participant
when we accept your Application.
We will credit your initial Purchase Payment to your Account within two
business days of receiving your completed Application. If your Application is
not complete, we will notify you. If we do not
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<PAGE>
have the necessary information to complete the Application within 5 business
days, we will send your money back to you or ask your permission to retain your
Purchase Payment until the Application is made complete. Then we will apply the
Purchase Payment within 2 business days of when the Application is complete.
AMOUNT AND FREQUENCY OF PURCHASE PAYMENTS
The amount of Purchase Payments may vary; however, we will not accept an
initial Purchase Payment of less than $10,000, and each additional Purchase
Payment must be at least $1,000, unless we waive these limits. In addition, we
will not accept a Purchase Payment if your Account Value is over $1 million, or
if the Purchase Payment would cause your Account Value to exceed $1 million,
unless we have approved the Payment in advance. Within these limits, you may
make Purchase Payments at any time during the Accumulation Phase.
ALLOCATION OF NET PURCHASE PAYMENTS
You may allocate your Purchase Payments among the different Sub-Accounts
and Guarantee Periods we offer. At any time, you may have amounts allocated
among up to 18 of the available options.
In your Application, you may specify the percentage of each Purchase
Payment to be allocated to each Sub-Account or Guarantee Period. These
percentages are called your allocation factors. You may change the allocation
factors for future Payments by sending us written notice of the change, on our
required form. We will use your new allocation factors for the first Purchase
Payment we receive with or after we have received notice of the change, and for
all future Purchase Payments, until we receive another change notice.
Although it is currently not our practice, we may deduct applicable
premium or similar taxes from your Purchase Payments. See "Contract Charges --
Premium Taxes." In that case, we will credit your Net Purchase Payment, which is
the Purchase Payment minus the amount of those taxes.
YOUR ACCOUNT
When we accept your first Purchase Payment, we establish an Account for
you, which we maintain throughout the Accumulation Phase of your Contract.
YOUR ACCOUNT VALUE
Your Account Value is the sum of the value of the two components of your
Contract: the Variable Account portion of your Contract ("Variable Account
Value") and the Fixed Account portion of your Contract ("Fixed Account Value").
These two components are calculated separately, as described below.
VARIABLE ACCOUNT VALUE
VARIABLE ACCUMULATION UNITS
In order to calculate your Variable Account Value, we use a measure called
a Variable Accumulation Unit for each Sub-Account. Your Variable Account Value
is the sum of your Account Value in each Sub-Account, which is the number of
your Variable Accumulation Units for that Sub-Account times the value of each
Unit.
VARIABLE ACCUMULATION UNIT VALUE
The value of each Variable Accumulation Unit in a Sub-Account reflects the
net investment performance of that Sub-Account. We determine that value once on
each day that the New York Stock Exchange is open for trading (a "Business
Day"), at the close of trading, which is currently 4:00 p.m.,
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<PAGE>
Eastern Time. The period that begins at the time Variable Accumulation Units are
valued on a Business Day and ends at that time on the next Business Day is
called a Valuation Period. On days other than Business Days, the value of a
Variable Accumulation Unit does not change.
To measure these values, we use a factor -- which we call the Net
Investment Factor-- which represents the net return on the Sub-Account's assets.
At the end of any Valuation Period, the value of a Variable Accumulation Unit
for a Sub-Account is equal to the value of that Sub-Account's Variable
Accumulation Units at the end of the previous Valuation Period, multiplied by
the Net Investment Factor. We calculate the Net Investment Factor by dividing
(1) the net asset value of a Series share held in the Sub-Account at the end of
that Valuation Period, plus the per share amount of any dividend or capital
gains distribution made by that Series during the Valuation Period, by (2) the
net asset value per share of the Series share at the end of the previous
Valuation Period; we then deduct a factor representing the mortality and expense
risk charge and administrative expense charge. See "Contract Charges."
For a hypothetical example of how we calculate the value of a Variable
Accumulation Unit, see the Statement of Additional Information.
CREDITING AND CANCELING VARIABLE ACCUMULATION UNITS
When we receive an allocation to a Sub-Account, either from a Net Purchase
Payment or a transfer of Account Value, we credit that amount to your Account in
Variable Accumulation Units. Similarly, we cancel Variable Accumulation Units
when you transfer or withdraw amounts from a Sub-Account, or when we deduct
certain charges under the Contract. We determine the number of Units credited or
canceled by dividing the dollar amount by the Variable Accumulation Unit value
for that Sub-Account at the end of the Valuation Period during which the
transaction or charge is effective.
FIXED ACCOUNT VALUE
Your Fixed Account value is the sum of all amounts allocated to Guarantee
Periods, either from Net Purchase Payments, transfers or renewals, plus interest
credited on those amounts, and minus withdrawals, transfers out of Guarantee
Periods, and any deductions for charges under the Contract taken from your Fixed
Account Value.
CREDITING INTEREST
We credit interest on amounts allocated to a Guarantee Period at the
applicable Guaranteed Interest Rate for the duration of the Guarantee Period.
The Guarantee Period begins the day we apply your allocation and ends when the
number of calendar years (or months if the Guarantee Period is less than one
year) in the Guarantee Period (measured from the end of the calendar month in
which the amount was allocated to the Guarantee Period) have elapsed. The last
day of the Guarantee Period is its Expiration Date. During the Guarantee Period,
we credit interest daily at a rate that yields the Guaranteed Interest Rate on
an annual effective basis.
GUARANTEE AMOUNTS
Each separate allocation you make to a Guarantee Period, together with
interest credited thereon, is called a Guarantee Amount. Each Guarantee Amount
is treated separately for purposes of determining the Market Value Adjustment.
RENEWALS
We will notify you in writing between 45 and 75 days before the Expiration
Date for any Guarantee Amount. A new Guarantee Period of the same duration will
begin automatically for that Guarantee Amount on the first day following the
Expiration Date, unless before the Expiration Date we receive (1) written notice
from you electing a different Guarantee Period from among those we then offer or
(2) instructions to transfer all or some of the Guarantee Amount to one or more
Sub-
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<PAGE>
Accounts, in accordance with the transfer privilege provisions of the Contract.
Each new allocation to a Guarantee Period must be at least $1,000.
EARLY WITHDRAWALS
If you withdraw, transfer, or annuitize an allocation to a Guarantee
Period before the Expiration Date, we will apply a Market Value Adjustment to
the transaction. This could result in an increase or decrease of your Account
Value, depending on interest rates at the time. You bear the risk that you will
receive less than your principal if the Market Value Adjustment applies.
TRANSFER PRIVILEGE
PERMITTED TRANSFERS
During the Accumulation Phase, you may transfer all or part of your
Account Value to one or more Sub-Accounts or Guarantee Periods then available,
subject to the following restrictions:
- you may not make more than 12 transfers in any Account Year;
- the amount transferred from a Sub-Account must be at least $1,000
unless you are transferring your entire balance in that Sub-Account;
- your Account Value remaining in a Sub-Account must be at least $1,000;
- the amount transferred from a Guarantee Period must be the entire
Guarantee Amount, except for transfers of interest credited during the
current Account Year;
- at least 30 days must elapse between transfers to or from Guarantee
Periods;
- transfers to or from Sub-Accounts are subject to terms and conditions
that may be imposed by the Series Fund; and
- we impose additional restrictions on market timers, which are further
described below.
These restrictions do not apply to transfers made under an approved dollar
cost averaging program.
There is usually no charge imposed on transfers; however, we reserve the
right to impose a transfer charge of $15 for each transfer. Transfers out of a
Guarantee Period more than 30 days before expiration of the period will be
subject to the Market Value Adjustment described below. Under current law there
is no tax liability for transfers.
REQUESTS FOR TRANSFERS
You may request transfers in writing or by telephone. The telephone
transfer privilege is available automatically, and does not require your written
election. We will require personal identifying information to process a request
for transfer made by telephone. We will not be liable for following instructions
communicated by telephone that we reasonably believe are genuine.
If we receive your transfer request before 4:00 p.m. Eastern Time on a
Business Day, it will be effective that day. Otherwise, it will be effective the
next Business Day.
MARKET TIMERS
The Contracts are not designed for professional market timing
organizations or other entities using programmed and frequent transfers. If you
wish to employ such strategies, you should not purchase a Contract. Accordingly,
transfers may be subject to restrictions if exercised by a market timing firm or
any other third party authorized to initiate transfer transactions on behalf of
multiple Participants. In imposing such restrictions, we may, among other
things, not accept (1) the transfer instructions of any agent acting under a
power of attorney on behalf of more than one Participant, or (2) the transfer
instructions of individual Participants who have executed preauthorized transfer
forms that are submitted at the same time by market timing firms or other third
parties on behalf of more than one Participant. We will not impose these
restrictions unless our actions are reasonably intended to prevent
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<PAGE>
the use of such transfers in a manner that will disadvantage or potentially
impair the Contract rights of other Participants.
In addition, the Series Fund has reserved the right to temporarily or
permanently refuse exchange requests from the Variable Account if, in MFS'
judgment, a Series would be unable to invest effectively in accordance with its
investment objective and policies, or would otherwise potentially be adversely
affected. In particular, a pattern of exchanges that coincide with a market
timing strategy may be disruptive to a Series and therefore may be refused.
Accordingly, the Variable Account may not be in a position to effectuate
transfers and may refuse transfer requests without prior notice. We also reserve
the right, for similar reasons, to refuse or delay exchange requests involving
transfers to or from the Fixed Account.
WAIVERS; REDUCED CHARGES; CREDITS; BONUS GUARANTEED INTEREST RATES
We may reduce or waive the withdrawal charge or Account Fee, credit
additional amounts, or grant bonus Guaranteed Interest Rates in certain
situations. These situations may include sales of Contracts (1) where selling
and/or maintenance costs associated with the Contracts are reduced, such as the
sale of several Contracts to the same Participant, sales of large Contracts, and
certain group sales, and (2) to officers, directors and employees of the Company
or its affiliates, registered representatives and employees of broker-dealers
with a current selling agreement with the Company and affiliates of such
representatives and broker-dealers, employees of affiliated asset management
firms, and persons who have retired from such positions ("Eligible Employees")
and immediate family members of Eligible Employees. Eligible Employees and their
immediate family members may also purchase a Contract without regard to minimum
Purchase Payment requirements. For other situations in which withdrawal charges
may be waived, see "Withdrawals, Withdrawal Charge and Market Value Adjustment."
OPTIONAL PROGRAMS
DOLLAR COST AVERAGING
Dollar cost averaging allows you to invest gradually, over time, in up to
12 Sub-Accounts. You may select a dollar cost averaging program at no extra
charge by allocating a minimum of $1,000 to a designated Sub-Account or to a
Guarantee Period we make available in connection with the program. Amounts
allocated to the Fixed Account under the program will earn interest at a rate
declared by the Company for the Guarantee Period you select. Each month or
quarter, as you select, we will transfer the same amount automatically to one or
more Sub-Accounts that you choose, up to a maximum of 12 Sub-Accounts. The
program continues until your Account Value allocated to the program is depleted
or you elect to stop the program. The final amount transferred from the Fixed
Account will include all interest earned.
Only Purchase Payments may be allocated to a dollar cost averaging
program. Previously applied amounts may not be transferred to a dollar cost
averaging program.
No Market Value Adjustment (either positive or negative) will apply to
amounts automatically transferred from the Fixed Account under the dollar cost
averaging program, except that if you discontinue or alter the program prior to
completion, amounts remaining in the Fixed Account will be transferred to the
Money Market Series Sub-Account, unless you instruct us otherwise, and the
Market Value Adjustment will be applied. Any new allocation of a Purchase
Payment to the program will be treated as commencing a new dollar cost averaging
program and is subject to the $1,000 minimum.
The main objective of a dollar cost averaging program is to minimize the
impact of short-term price fluctuations on Account Value. Since you transfer the
same dollar amount to the variable investment options at set intervals, dollar
cost averaging allows you to purchase more Variable Accumulation Units (and,
indirectly, more Series Fund shares) when prices are low and fewer Variable
Accumulation Units (and, indirectly, fewer Series Fund shares) when prices are
high. Therefore, you may achieve a lower average cost per Variable Accumulation
Unit over the long term. A dollar cost averaging program allows you to take
advantage of market fluctuations. However, it is important to understand that a
dollar cost averaging program does not assure a profit or protect against loss
in a declining market.
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ASSET ALLOCATION
One or more asset allocation programs may be available in connection with
the Contracts, at no extra charge. Asset allocation is the process of investing
in different asset classes -- such as equity funds, fixed income funds, and
money market funds -- depending on your personal investment goals, tolerance for
risk, and investment time horizon. By spreading your money among a variety of
asset classes, you may be able to reduce the risk and volatility of investing,
although there are no guarantees, and asset allocation does not insure a profit
or protect against loss in declining market.
Currently, you may select one of three asset allocation models, each of
which represents a combination of Sub-Accounts with a different level of risk.
The available models are the conservative asset allocation model, the moderate
asset allocation model, and the aggressive asset allocation model. Each model
allocates a different percentage of Account Value to Sub-Accounts investing in
the various asset classes, with the conservative model allocating the lowest
percentage to Sub-Accounts investing in the equity asset class and the
aggressive model allocating the highest percentage to the stock asset class.
These models, as well as the terms and conditions of the asset allocation
program, are fully described in a separate brochure. Additional programs may be
available in the future.
If you elect an asset allocation program, we will automatically allocate
your Purchase Payments among the Sub-Accounts represented in the model you
choose. By your election of an asset allocation program, you thereby authorize
us to automatically reallocate your Account Value on a quarterly basis to
reflect the current composition of the model you have selected, without further
instruction, until we receive notification that you wish to terminate the
program, or choose a different model.
SYSTEMATIC WITHDRAWAL AND INTEREST OUT PROGRAMS
If you have an Account Value of $10,000 or more, you may select our
Systematic Withdrawal or Interest Out Program.
Under the Systematic Withdrawal Program, you determine the amount and
frequency of regular withdrawals you would like to receive from your Fixed
and/or Variable Account Value and we will effect them automatically. Under the
Interest Out Program, we will automatically pay to you or reinvest interest
credited for all Guarantee Periods you have chosen. You may change or stop
either program at any time, by written notice to us. Withdrawals may be included
in income and subject to a 10% federal tax penalty, as well as all charges and
any Market Value Adjustment applicable upon withdrawal. You should consult your
adviser before choosing these options.
PORTFOLIO REBALANCING PROGRAM
Under the Portfolio Rebalancing Program, we transfer funds among the
Sub-Accounts to maintain the percentage allocation you have selected among these
Sub-Accounts. At your election, we will make these transfers on a quarterly,
semi-annual or annual basis.
Portfolio Rebalancing does not permit transfers to or from any Guarantee
Period.
SECURED FUTURE PROGRAM
Under this program, we divide your Purchase Payment between the Fixed
Account and the Variable Account. For the Fixed Account portion, you choose a
Guarantee Period from among those we offer, and we allocate to that Guarantee
Period the portion of your Purchase Payment necessary so that at the end of the
Guarantee Period, your Fixed Account allocation, including interest, will equal
the entire amount of your original Purchase Payment. The remainder of the
original Purchase Payment will be invested in Sub-Accounts of your choice. At
the end of the Guarantee Period, you will be guaranteed the amount of your
Purchase Payment (assuming no withdrawals), plus you will have the benefit, if
any, of the investment performance of the Sub-Accounts you have chosen.
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<PAGE>
WITHDRAWALS, WITHDRAWAL CHARGE AND MARKET VALUE ADJUSTMENT
CASH WITHDRAWALS
REQUESTING A WITHDRAWAL
At any time during the Accumulation Phase you may withdraw in cash all or
any portion of your Account Value. To make a withdrawal, you must send us a
written request at our Annuity Service Mailing Address. Your request must
specify whether you want to withdraw the entire amount of your Account or, if
less, the amount you wish to withdraw.
All withdrawals may be subject to a withdrawal charge (see "Withdrawal
Charge" below) and withdrawals from your Fixed Account Value also may be subject
to a Market Value Adjustment (see "Market Value Adjustment" below). Upon request
we will notify you of the amount we would pay in the event of a full or partial
withdrawal. Withdrawals also may have adverse federal income tax consequences,
including a 10% penalty tax. See "Federal Tax Status." You should carefully
consider these tax consequences before requesting a cash withdrawal.
FULL WITHDRAWALS
If you request a full withdrawal, we calculate the amount we will pay you
as follows. We start with the total value of your Account at the end of the
Valuation Period during which we receive your withdrawal request; we deduct the
Account Fee for the Account Year in which the withdrawal is made; we add or
subtract the amount of any Market Value Adjustment applicable to your Fixed
Account Value; and finally, we deduct any applicable withdrawal charge.
A full withdrawal results in the surrender of your Contract, and
cancellation of all rights and privileges under your Contract.
PARTIAL WITHDRAWALS
If you request a partial withdrawal we will pay you the actual amount
specified in your request and then reduce the value of your Account by deducting
the amount paid, adding or deducting any Market Value Adjustment applicable to
amounts withdrawn from the Fixed Account, and deducting any applicable
withdrawal charge.
You may specify the amount you want withdrawn from each Sub-Account and/or
Guarantee Amount to which your Account is allocated. If you do not so specify,
we will deduct the total amount you request pro rata, based on your allocations
at the end of the Valuation Period during which we receive your request.
If you request a partial withdrawal that would result in your Account
Value being reduced to an amount less than the Account Fee for the Account Year
in which you make the withdrawal, we will treat it as a request for a full
withdrawal.
TIME OF PAYMENT
We will pay you the applicable amount of any full or partial withdrawal
within 7 days after we receive your withdrawal request, except in cases where we
are permitted to defer payment under the Investment Company Act of 1940 and
applicable state insurance law. Currently, we may defer payment of amounts you
withdraw from the Variable Account only for following periods:
- when the New York Stock Exchange is closed except weekends and holidays
or when trading on the New York Stock Exchange is restricted;
- when it is not reasonably practical to dispose of securities held by
the Series Fund or to determine the value of the net assets of the
Series Fund, because an emergency exists; or
- when an SEC order permits us to defer payment for the protection of
Participants.
We also may defer payment of amounts you withdraw from the Fixed Account for up
to 6 months from the date we receive your withdrawal request. We do not pay
interest on the amount of any payments we defer.
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WITHDRAWAL RESTRICTIONS FOR QUALIFIED PLANS
If yours is a Qualified Contract, you should carefully check the terms of
the plan for limitations and restrictions on cash withdrawals.
Special restrictions apply to withdrawals from Contracts used for Section
403(b) annuities. See "Federal Tax Status -- Tax-Sheltered Annuities."
WITHDRAWAL CHARGE
We do not deduct any sales charge from your Purchase Payments when they
are made. However, we may impose a withdrawal charge (known as a "contingent
deferred sales charge") on certain amounts you withdraw. We impose this charge
to defray some of our expenses related to the sale of the Contracts, such as
commissions we pay to agents, the cost of sales literature, and other
promotional costs and transaction expenses.
FREE WITHDRAWAL AMOUNT
In each Account Year you may withdraw a portion of your Account Value --
which we call the "free withdrawal amount" -- before incurring the withdrawal
charge. For any year, the free withdrawal amount is equal to (1) 10% of the
amount of all Purchase Payments you have made during the last 7 Account Years,
including the current Account Year (the "Annual Withdrawal Allowance"), plus (2)
the amount of all Purchase Payments made before the last 7 Account Years that
you have not previously withdrawn. Any portion of the Annual Withdrawal
Allowance that you do not use in an Account Year is cumulative; that is, it is
carried forward and available for use in future years.
For convenience, we refer to Purchase Payments made during the last 7
Account Years (including the current Account Year) as "New Payments," and all
Purchase Payments made before the last 7 Account Years as "Old Payments."
For example, assume you wish to make a withdrawal from your Contract in
Account Year 10. You made an initial Purchase Payment of $10,000 in Account Year
1, you made one additional Purchase Payment of $8,000 in Account Year 8, and you
have made no previous withdrawals. Your Account Value in Account Year 10 is
$35,000. The free withdrawal amount for Account Year 10 is $19,400, calculated
as follows:
- $800, which is the Annual Withdrawal Allowance for Account Year 10 (10%
of the $8,000 Purchase Payment made in Account Year 8, the only New
Payment); plus
- $8,600, which is the total of the unused Annual Withdrawal Allowances
of $1,000 for each of Account Years 1 through 7 and $800 for each of
Account Years 8 and 9 that are carried forward and available for use in
Account Year 10; plus
- $10,000, which is the amount of all Old Payments that you have not
previously withdrawn.
WITHDRAWAL CHARGE ON PURCHASE PAYMENTS
If you withdraw more than the free withdrawal amount in any Account Year,
we consider the excess amount to be withdrawn first from New Payments that you
have not previously withdrawn. We impose the withdrawal charge on the amount of
these New Payments. Thus, the maximum amount on which we will impose the
withdrawal charge in any year will never be more than the total of all New
Payments that you have not previously withdrawn.
The amount of your withdrawal, if any, that exceeds the total of the free
withdrawal amount plus the aggregate amount of all New Payments not previously
withdrawn, is not subject to the withdrawal charge.
ORDER OF WITHDRAWAL
New Payments are withdrawn on a first-in first-out basis until all New
Payments have been withdrawn. For example, assume the same facts as in the
example above. In Account Year 10 you wish to withdraw $25,000. We attribute the
withdrawal first to the free withdrawal amount of $19,400, which
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is not subject to the withdrawal charge. The remaining $5,600 is withdrawn from
the Purchase Payment made in Account Year 8 (the only New Payment) and is
subject to the withdrawal charge. The $2,400 balance of the Account Year 8
Purchase Payment will remain in your Account. If you make a subsequent $5,000
withdrawal in Account Year 10, $2,400 of that amount will be withdrawn from the
remainder of the Account Year 8 Purchase Payment and will be subject to the
withdrawal charge. The other $2,600 of your withdrawal (which exceeds the amount
of all New Payments not previously withdrawn) will not be subject to the
withdrawal charge.
CALCULATION OF WITHDRAWAL CHARGE
We calculate the amount of the withdrawal charge by multiplying the
Purchase Payments you withdraw by a percentage. The percentage varies according
to the number of Account Years the Purchase Payment has been held in your
Account, including the year in which you made the Payment, but not the year in
which you withdraw it. The applicable percentages are as follows:
<TABLE>
<CAPTION>
NUMBER OF
ACCOUNT YEARS PERCENTAGE
- -------------- ---------------
<S> <C>
0-1 6%
2-3 5%
4-5 4%
6 3%
7 or more 0%
</TABLE>
For example, again using the same facts as in the example above, the
percentage applicable to the withdrawals in Account Year 10 of Purchase Payments
made in Account Year 8 would be 5%, because the number of Account Years the
Purchase Payments have been held in your Account would be two.
The withdrawal charge will never be greater than 6% of the aggregate
amount of Purchase Payments you make under the Contract.
For a Group Contract, we may modify the withdrawal charges and limits,
upon notice to the Owner of the Group Contract. However, any modification will
only apply to Accounts established after the date of the modification.
For additional examples of how we calculate withdrawal charges, please see
Appendix C.
TYPES OF WITHDRAWALS NOT SUBJECT TO WITHDRAWAL CHARGE
We do not impose a withdrawal charge on withdrawals from the Accounts of
(a) our employees, (b) employees of our affiliates, or (c) licensed insurance
agents who sell the Contracts. We also may waive withdrawal charges with respect
to Purchase Payments derived from the surrender of other annuity contracts we
issue.
If approved in your state, we will waive the withdrawal charge for a full
withdrawal if (a) at least one year has passed since we issued your Contract and
(b) you are confined to an eligible nursing home and have been confined there
for at least the preceding 180 days, or any shorter period required by your
state. An "eligible nursing home" means a licensed hospital or licensed skilled
or intermediate care nursing facility at which medical treatment is available on
a daily basis and daily medical records are kept for each patient. You must
provide us evidence of confinement in the form we determine.
For each Qualified Contract, the free withdrawal amount in any Account
Year will be the greater of the free withdrawal amount described above and any
amounts required to be withdrawn to comply with the minimum distribution
requirement of the Internal Revenue Code. This applies only to the portion of
the required minimum distribution attributable to that Qualified Contract.
We do not impose the withdrawal charge on amounts you apply to provide an
annuity, amounts we pay as a death benefit, or amounts you transfer among the
Sub-Accounts, between the Sub-Accounts and the Fixed Account, or within the
Fixed Account.
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MARKET VALUE ADJUSTMENT
We will apply a market value adjustment if you withdraw or transfer
amounts from your Fixed Account Value more than 30 days before the end of the
applicable Guarantee Period. For this purpose, using Fixed Account Value to
provide an annuity is considered a withdrawal, and the Market Value Adjustment
will apply. However, we will not apply the Market Value Adjustment to automatic
transfers to a Sub-Account from a Guarantee Period as part of our dollar cost
averaging program.
We apply the Market Value Adjustment separately to each Guarantee Amount
in the Fixed Account, that is to each separate allocation you have made to a
Guarantee Period together with interest credited on that allocation. However, we
do not apply the adjustment to the amount of interest credited during your
current Account Year. Any withdrawal from a Guarantee Amount is attributed first
to such interest.
A Market Value Adjustment may decrease, increase or have no effect on your
Account Value. This will depend on changes in interest rates since you made your
allocation to the Guarantee Period and the length of time remaining in the
Guarantee Period. In general, if the Guaranteed Interest Rate we currently
declare for Guarantee Periods equal to the balance of your Guarantee Period (or
your entire Guarantee Period for Guarantee Periods of less than one year) is
higher than your Guaranteed Interest Rate, the Market Value Adjustment is likely
to decrease your Account Value. If our current Guaranteed Interest Rate is
lower, the Market Value Adjustment is likely to increase your Account Value.
We determine the amount of the Market Value Adjustment by multiplying the
amount that is subject to the adjustment by the following formula:
<TABLE>
<S> <C>
N/12
1 + I
( -------- ) -1
1 + J + b
</TABLE>
where:
I is the Guaranteed Interest Rate applicable to the Guarantee Amount from
which you withdraw, transfer or annuitize;
J is the Guaranteed Interest Rate we declare at the time of your
withdrawal, transfer or annuitization for Guarantee Periods equal to the length
of time remaining in the Guarantee Period applicable to your Guarantee Amount,
rounded to the next higher number of complete years, for Guarantee Periods of
one year or more. For any Guarantee Periods of less than one year, J is the
Guaranteed Interest Rate we declare at the time of your withdrawal, transfer or
annuitization for a Guarantee Period of the same length as your Guarantee
Period. If, at that time, we do not offer the applicable Guarantee Period we
will use an interest rate determined by straight-line interpolation of the
Guaranteed Interest Rates for the Guarantee Periods we do offer;
N is the number of complete months remaining in your Guarantee Period; and
b is a factor that currently is 0% but that in the future we may increase
to up to 0.25%. Any increase would be applicable only to Participants who
purchase their Contracts after the date of that increase.
We will apply the Market Value Adjustment to the amount being withdrawn
after deduction of any Account Fee, if applicable, but before we impose any
withdrawal charge on the amount withdrawn.
For examples of how we calculate the Market Value Adjustment, see Appendix
C.
No Market Value Adjustment will apply to Contracts issued in the states of
Maryland, Texas and Washington, or to one year Guarantee Periods under Contracts
issued in Oregon.
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CONTRACT CHARGES
ACCOUNT FEE
Each year during the Accumulation Phase of your Contract we will deduct
from your Account an Account Fee to help cover the administrative expenses we
incur related to the issuance of Contracts and the maintenance of Accounts. We
deduct the Account Fee on each Account Anniversary, which is the anniversary of
the first day of the month after we issue your Contract. In Account Years 1
through 5, the Account Fee is equal to the lesser of (a) $35 and (b) 2% of your
Account Value. After Account Year 5, we may change the Account Fee each year,
but the Account Fee will never exceed the lesser of (a) $50 and (b) 2% of your
Account Value. We deduct the Account Fee pro rata from each Sub-Account and each
Guarantee Amount, based on the allocation of your Account Value on your Account
Anniversary.
We will not charge you the Account Fee if:
(1) your Account has been allocated only to the Fixed Account during the
applicable Account Year; or
(2) your Account Value is more than $75,000 on your Account Anniversary.
If you make a full withdrawal of your Account, we will deduct the full
amount of the Account Fee at the time of the withdrawal. In addition, on the
Annuity Commencement Date we will deduct a pro rata portion of the Account Fee
to reflect the time elapsed between the last Account Anniversary and the day
before the Annuity Commencement Date.
After the Annuity Commencement Date, we will deduct an annual Account Fee
of $35 in the aggregate in equal amounts from each Variable Annuity payment we
make during the year. We do not deduct any fee from Fixed Annuity payments.
ADMINISTRATIVE EXPENSE CHARGE
We deduct an administrative expense charge from the assets of the Variable
Account at an annual effective rate equal to 0.15% during both the Accumulation
Phase and the Income Phase. This charge is designed to reimburse expenses we
incur in administering the Contracts, the Accounts and the Variable Account that
are not covered by the Account Fee.
MORTALITY AND EXPENSE RISK CHARGE
We deduct a mortality and expense charge from the assets of the Variable
Account at an effective annual rate equal to 1.25% during both the Accumulation
Phase and the Income Phase. The mortality risk we assume arises from our
contractual obligation to continue to make annuity payments to each Annuitant,
regardless of how long the Annuitant lives and regardless of how long all
Annuitants as a group live. This obligation assures each Annuitant that neither
the longevity of fellow Annuitants nor an improvement in life expectancy
generally will have an adverse effect on the amount of any annuity payment
received under the contract. The expense risk we assume is the risk that the
Account Fee and administrative expense charge we assess under the Contracts may
be insufficient to cover the actual total administrative expenses we incur. If
the amount of the charge is insufficient to cover the mortality and expense
risks, we will bear the loss. If the amount of the charge is more than
sufficient to cover the risks, we will make a profit on the charge. We may use
this profit for any proper corporate purpose, including the payment of marketing
and distribution expenses for the Contracts.
PREMIUM TAXES
Some states and local jurisdictions impose a premium tax on us that is
equal to a specified percentage of the Purchase Payments you make. In many
states there is no premium tax. We believe that the amounts of applicable
premium taxes currently range from 0% to 3.5%. You should consult a tax adviser
to find out if your state imposes a premium tax and the amount of any tax.
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In order to reimburse us for the premium tax we may pay on Purchase
Payments, our policy is to deduct the amount of such taxes from the amount you
apply to provide an annuity at the time of annuitization. However, we reserve
the right to deduct the amount of any applicable tax from your Account at any
time, including at the time you make a Purchase Payment or make a full or
partial withdrawal. We do not make any profit on the deductions we make to
reimburse premium taxes.
SERIES FUND EXPENSES
There are fees and charges deducted from each Series of the Series Fund.
These fees and expenses are described in the Series Fund's Prospectus and
Statement of Additional Information.
MODIFICATION IN THE CASE OF GROUP CONTRACTS
For Group Contracts, we may modify the Account Fee, the administrative
expense charge and the mortality and expense risk charge upon notice to Owners.
However, such modification will apply only with respect to Participant Accounts
established after the effective date of the modification.
DEATH BENEFIT
If you die during the Accumulation Phase, we will pay a death benefit to
your Beneficiary, using the payment method elected (a single cash payment or one
of our Annuity Options). If the Beneficiary is not living on the date of death,
we will pay the death benefit in one sum to your estate. We do not pay a death
benefit if you die during the Income Phase. However, the Beneficiary will
receive any payments provided under an Annuity Option that is in effect.
If your spouse is your Beneficiary, upon your death your spouse may elect
to continue the Contract as the Participant, rather than receive the death
benefit. In that case, the amount of your death benefit, calculated as described
below, will become the Contract's Account Value on the Death Benefit Date. All
other provisions, including any withdrawal charges, will continue as if your
spouse had purchased the Contract on the original date of coverage.
AMOUNT OF DEATH BENEFIT
To calculate the amount of your death benefit, we use a "Death Benefit
Date." The Death Benefit Date is the date we receive proof of your death in an
acceptable form ("Due Proof of Death") if you have elected a death benefit
payment method before your death and it remains effective. Otherwise, the Death
Benefit Date is the later of the date we receive Due Proof of Death or the date
we receive the Beneficiary's election of either payment method or, if the
Beneficiary is your spouse, Contract continuation. If we do not receive the
Beneficiary's election within 60 days after we receive Due Proof of Death, the
Death Benefit Date will be the last day of the 60 day period.
The amount of the death benefit is determined as of the Death Benefit
Date.
If you were 85 or younger on your Contract Date (the date we accepted your
first Purchase Payment), the death benefit will be the greatest of the following
amounts:
1. Your Account Value for the Valuation Period during which the Death
Benefit Date occurs;
2. The amount we would pay if you had surrendered your entire Account on
the Death Benefit Date;
3. Your Account Value on the Seven-Year Anniversary immediately before
the Death Benefit Date, adjusted for subsequent Purchase Payments and
partial withdrawals and charges made between the Seven-Year
Anniversary and the Death Benefit Date;
4. Your highest Account Value on any Account Anniversary before your 81st
birthday, adjusted for subsequent Purchase Payments and partial
withdrawals and charges made between that Account Anniversary and the
Death Benefit Date; and
5. Your total Purchase Payments plus the following interest accruals,
adjusted for partial withdrawals; interest will accrue on Purchase
Payments allocated to and transfers to the Variable
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Account while they remain in the Variable Account at 5% per year until
the first day of the month following your 80th birthday, or until the
Purchase Payment or amount transferred has doubled in amount,
whichever is earlier.
If you were 86 or older on your Contract Date, the death benefit is equal
to amount (2) above; because this amount will reflect any applicable withdrawal
charges and market value adjustment, it may be less than your Account Value.
In calculating the death benefit amount payable under (3), (4), and (5),
any partial withdrawals will reduce the amount by the ratio of the Account Value
immediately following the withdrawal to the Account Value immediately before the
withdrawal.
If the death benefit is amount (2), (3), (4), or (5), your Account Value
will be increased by the excess, if any, of that amount over amount (1). Any
such increase will be allocated to the Sub-Accounts in proportion to your
Account Value in those Sub-Accounts on the Death Benefit Date. Also, any portion
of this new Account Value attributed to the Fixed Account will be transferred to
the Money Market Series Sub-Account (without the application of a Market Value
Adjustment). The Beneficiary may then transfer to the Fixed Account and begin a
new Guarantee Period.
METHOD OF PAYING DEATH BENEFIT
The death benefit may be paid in a single cash payment or as an annuity
(either fixed, variable or a combination), under one or more of our Annuity
Options. We describe the Annuity Options in this Prospectus under "Income Phase
- -- Annuity Provisions."
During the Accumulation Phase, you may elect the method of payment for the
death benefit. If no such election is in effect on the date of your death, the
Beneficiary may elect either a single cash payment or an annuity. With respect
to a Non-Qualified Contract, if the Beneficiary is the Owner's spouse, the
Beneficiary may elect to continue the Non-Qualified Contract. These elections
are made by sending us a completed election form, which we will provide. If we
do not receive the Beneficiary's election within 60 days after we receive Due
Proof of Death, we will pay the death benefit in a single cash payment.
If we pay the death benefit in the form of an Annuity Option, the
Beneficiary becomes the Annuitant under the terms of that Annuity Option.
NON-QUALIFIED CONTRACTS
If your Contract is a Non-Qualified Contract, special distribution rules
apply to the payment of the death benefit. The amount of the death benefit must
be distributed either (1) as a lump sum within 5 years after your death or (2)
if in the form of an annuity, over a period not greater than the life or
expected life of the "designated beneficiary" within the meaning of Section
72(s) of the Internal Revenue Code, with payments beginning no later than one
year after your death.
The person you have named a Beneficiary under your Contract, if any, will
be the "designated beneficiary." If the named Beneficiary is not living, the
Annuitant automatically becomes the designated beneficiary.
If the designated beneficiary is your surviving spouse, your spouse may
continue the Contract in his or her own name as Participant. To make this
election, your spouse must give us written notification within 60 days after we
receive Due Proof of Death. In that case, we will not pay a death benefit, and
the Account Value will be increased to reflect the death benefit calculation.
The special distribution rules will then apply on the death of your spouse.
During the Income Phase, if the Annuitant dies, the remaining value of the
Annuity Option in place must be distributed at least as rapidly as the method of
distribution under that option.
If the Participant is not a natural person, these distribution rules apply
on a change in, or the death of, any Annuitant or Co-Annuitant.
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Payments made in contravention of these special rules would adversely
affect the treatment of the Contracts as annuity contracts under the Internal
Revenue Code. Neither you nor the Beneficiary may exercise rights that would
have that effect.
SELECTION AND CHANGE OF BENEFICIARY
You select your Beneficiary in your Application. You may change your
Beneficiary at any time by sending us written notice on our required form,
unless you previously made an irrevocable Beneficiary designation. A new
Beneficiary designation is not effective until we record the change.
PAYMENT OF DEATH BENEFIT
Payment of the death benefit in cash will be made within 7 days of the
Death Benefit Date, except if we are permitted to defer payment in accordance
with the Investment Company Act of 1940. If an Annuity Option is elected, the
Annuity Commencement Date will be the first day of the second calendar month
following the Death Benefit Date, and your Account will remain in effect until
the Annuity Commencement Date.
DUE PROOF OF DEATH
We accept the following as proof of any person's death:
- an original certified copy of an official death certificate;
- an original certified copy of a decree of a court of competent
jurisdiction as to the finding of death; or
- any other proof we find satisfactory.
THE INCOME PHASE -- ANNUITY PROVISIONS
During the Income Phase, we make regular monthly payments to your
Annuitant.
The Income Phase of your Contract begins with the Annuity Commencement
Date. On that date, we apply your Account Value, adjusted as described below,
under the Annuity Option or Options you have selected, and we make the first
payment.
Once the Income Phase begins, no lump sum settlement option or cash
withdrawals are permitted, except pursuant to Annuity Option D, Monthly Payments
for a Specified Period Certain, as described below under the heading "Annuity
Options," and you cannot change the Annuity Option selected. You may request a
full withdrawal before the Annuity Commencement Date, which will be subject to
all charges applicable on withdrawals. See "Cash Withdrawals, Withdrawal Charge
and Market Value Adjustment."
SELECTION OF THE ANNUITANT OR CO-ANNUITANT
You select the Annuitant in your Application. The Annuitant is the person
who receives payments during the Income Phase and on whose life these payments
are based. In your Contract, the Annuity Options refer to the Annuitant as the
"Payee." If you name someone other than yourself as Annuitant and the Annuitant
dies before the Income Phase, you become the Annuitant.
In a Non-Qualified Contract, if you name someone other than yourself as
Annuitant, you may also select a Co-Annuitant, who will become the new Annuitant
if the original Annuitant dies before the Income Phase (if both the Annuitant
and Co-Annuitant die before the Income Phase, you become the Annuitant). If you
have named both an Annuitant and a Co-Annuitant, you may designate one of them
to become the sole Annuitant as of the Annuity Commencement Date, if both are
living at that time. If you have not made that designation on the 30th day
before the Annuity Commencement Date, and both the Annuitant and the
Co-Annuitant are still living, the Co-Annuitant will become the Annuitant.
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When an Annuity Option has been selected as the method of paying the death
benefit, the Beneficiary is the Annuitant.
SELECTION OF THE ANNUITY COMMENCEMENT DATE
You select the Annuity Commencement Date in your Application. The
following restrictions apply to the date you may select:
- The earliest possible Annuity Commencement date is the first day of the
second month following your Contract Date.
- The latest possible Annuity Commencement Date is the first day of the
month following the Annuitant's 95th birthday or, if there is a
Co-Annuitant, the 95th birthday of the younger of the Annuitant and
Co-Annuitant.
- The Annuity Commencement Date must always be the first day of a month.
You may change the Annuity Commencement Date from time to time by sending
us written notice, with the following additional limitations:
- We must receive your notice at least 30 days before the current Annuity
Commencement Date.
- The new Annuity Commencement Date must be at least 30 days after we
receive the notice.
There may be other restrictions on your selection of the Annuity
Commencement Date imposed by your retirement plan or applicable law. In most
situations, current law requires that for a Qualified Contract, certain minimum
distributions must commence no later than April 1 following the year you reach
age 70 1/2 (or, for Qualified Contracts other than IRAs, no later than April 1
following the year the Annuitant retires, if later than the year the Annuitant
reaches age 70 1/2).
ANNUITY OPTIONS
We offer the following Annuity Options for payments during the Income
Phase. Each Annuity Option may be selected for either a Variable Annuity, a
Fixed Annuity, or a combination of both. We may also agree to other settlement
options, in our discretion.
ANNUITY OPTION A -- LIFE ANNUITY
We provide monthly payments during the lifetime of the Annuitant. Annuity
payments stop when the Annuitant dies. There is no provision for continuation of
any payments to a Beneficiary.
ANNUITY OPTION B -- LIFE ANNUITY WITH 60, 120, 180 OR 240 MONTHLY PAYMENTS
CERTAIN
We make monthly payments during the lifetime of the Annuitant. In
addition, we guarantee that the Beneficiary will receive monthly payments for
the remainder of the period certain, if the Annuitant dies during that period.
The election of a longer period results in smaller monthly payments. If no
Beneficiary is designated, we pay the discounted value of the remaining payments
in one sum to the Annuitant's estate. The Beneficiary may also elect to receive
the discounted value of the remaining payments in one sum. The discount rate for
this purpose will be the assumed interest rate in effect; the discount rate for
a Fixed Annuity will be based on the interest rate we used to determine the
amount of each payment.
ANNUITY OPTION C -- JOINT AND SURVIVOR ANNUITY
We make monthly payments during the lifetime of the Annuitant and another
person you designate and during the lifetime of the survivor of the two. We stop
making payments when the last survivor dies. There is no provision for
continuance of any payments to a Beneficiary.
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ANNUITY OPTION D -- MONTHLY PAYMENTS FOR A SPECIFIED PERIOD CERTAIN
We make monthly payments for a specified period of time from 5 to 30
years, as you elect. If payments under this option are paid on a variable
annuity basis, the Annuitant may elect to receive in one sum the discounted
value of the remaining payments, less any applicable withdrawal charge. The
discount rate for a Variable Annuity will be the assumed interest rate in
effect. If the Annuitant dies during the period selected, the remaining income
payments are made as described under Annuity Option B. The election of this
Annuity Option may result in the imposition of a penalty tax.
SELECTION OF ANNUITY OPTION
You select one or more of the Annuity Options, which you may change from
time to time during the Accumulation Phase, as long as we receive your selection
or change in writing at least 30 days before the Annuity Commencement Date. If
we have not received your written selection on the 30th day before the Annuity
Commencement Date, you will receive Annuity Option B, for a life annuity with
120 monthly payments certain.
You may specify the proportion of your Adjusted Account Value you wish to
provide a Variable Annuity or a Fixed Annuity. Under a Variable Annuity, the
dollar amount of payments will vary, while under a Fixed Annuity, the dollar
amount of payments will remain the same. If you do not specify a Variable
Annuity or a Fixed Annuity, your Adjusted Account Value will be divided between
Variable Annuities and Fixed Annuities in the same proportions as your Account
Value was divided between the Variable and Fixed Accounts on the Annuity
Commencement Date. You may allocate your Adjusted Account Value applied to a
Variable Annuity among the Sub-Accounts, or we will use your existing
allocations.
There may be additional limitations on the options you may elect under
your particular retirement plan or applicable law.
REMEMBER THAT THE ANNUITY OPTIONS MAY NOT BE CHANGED ONCE ANNUITY PAYMENTS
BEGIN.
AMOUNT OF ANNUITY PAYMENTS
ADJUSTED ACCOUNT VALUE
The Adjusted Account Value is the amount we apply to provide a Variable
Annuity and/or a Fixed Annuity. We calculate Adjusted Account Value by taking
your Account Value on the Business Day just before the Annuity Commencement Date
and making the following adjustments:
- We deduct a proportional amount of the Account Fee, based on the
fraction of the current Account Year that has elapsed;
- If applicable, we apply the Market Value Adjustment to your Account
Value in the Fixed Account, which may result in a deduction, an
addition, or no change; and
- We deduct any applicable premium tax or similar tax if not previously
deducted.
VARIABLE ANNUITY PAYMENTS
Variable Annuity payments may vary each month. We determine the dollar
amount of the first payment using the portion of your Adjusted Account Value
applied to a Variable Annuity and the Annuity Payment Rates in your Contract,
which are based on an assumed interest rate of 3% per year, compounded annually.
See "Annuity Payment Rates."
To calculate the remaining payments, we convert the amount of the first
payment into Annuity Units for each Sub-Account; we determine the number of
those Annuity Units by dividing the portion of the first payment attributable to
the Sub-Account by the Annuity Unit Value of that Sub-Account for the Valuation
Period ending just before the Annuity Commencement Date. This number of Annuity
Units for each Sub-Account will remain constant (unless the Annuitant requests
an exchange of Annuity Units). However, the dollar amount of the next Variable
Annuity payment -- which is the sum of the number of Annuity Units for each
Sub-Account times its Annuity Unit Value for the Valuation
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Period ending just before the date of the payment -- will increase, decrease, or
remain the same, depending on the net investment return of the Sub-Accounts.
If the net investment return of the Sub-Accounts selected is the same as
the assumed interest rate of 3%, compounded annually, the payments will remain
level. If the net investment return exceeds the assumed interest rate, payments
will increase and, conversely, if it is less than the assumed interest rate,
payments will decrease.
Please refer to the Statement of Additional Information for more
information about calculating Variable Annuity Units and Variable Annuity
payments, including examples of these calculations.
FIXED ANNUITY PAYMENTS
Fixed Annuity payments are the same each month. We determine the dollar
amount of each Fixed Annuity payment using the fixed portion of your Adjusted
Account Value and the applicable Annuity Payment Rates. These will be either (1)
the rates in your Contract, which are based on a minimum guaranteed interest
rate of 3% per year, compounded annually, or (2) new rates we have published and
are using on the Annuity Commencement Date, if they are more favorable. See
"Annuity Payment Rates."
MINIMUM PAYMENTS
If your Adjusted Account Value is less than $2,000, or the first annuity
payment for any Annuity Option is less than $20, we will pay the Adjusted
Account Value to the Annuitant in one payment.
EXCHANGE OF VARIABLE ANNUITY UNITS
During the Income Phase, the Annuitant may exchange Annuity Units from one
Sub-Account to another, up to 12 times each Account Year. To make an exchange,
the Annuitant sends us, at our Annuity Service Mailing Address, a written
request stating the number of Annuity Units in the Sub-Account he or she wishes
to exchange and the new Sub-Account for which Annuity Units are requested. The
number of new Annuity Units will be calculated so the dollar amount of an
annuity payment on the date of the exchange would not be affected. To calculate
this number, we use Annuity Unit values for the Valuation Period during which we
receive the exchange request.
We permit only exchanges among Sub-Accounts. No exchanges to or from a
Fixed Annuity are permitted.
ACCOUNT FEE
During the Income Phase, we deduct the annual Account Fee of $35 in equal
amounts from each Variable Annuity Payment. We do not deduct the Account Fee
from Fixed Annuity payments.
ANNUITY PAYMENT RATES
The Contract contains Annuity Payment Rates for each Annuity Option
described in this Prospectus. The rates show, for each $1,000 applied, the
dollar amount of: (a) the first monthly Variable Annuity payment based on the
assumed interest rate specified in the applicable Contract (at least 3% per
year, compounded annually); and (b) the monthly Fixed Annuity payment, when this
payment is based on the minimum guaranteed interest rate specified in the
Contract (at least 3% per year, compounded annually). We may change these rates
under Group Contracts for Accounts established after the effective date of such
change (See "Other Contract Provisions -- Modification").
The Annuity Payment Rates may vary according to the Annuity Option elected
and the adjusted age of the Annuitant. The Contract also describes the method of
determining the adjusted age of the Annuitant. The mortality table used in
determining the Annuity Payment Rates for Options A, B and C is the 1983
Individual Annuitant Mortality Table.
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ANNUITY OPTIONS AS METHOD OF PAYMENT FOR DEATH BENEFIT
You or your Beneficiary may also select one or more Annuity Options to be
used in the event of your death before the Income Phase, as described under the
"Death Benefit" section of this Prospectus. In that case, your Beneficiary will
be the Annuitant. The Annuity Commencement Date will be the first day of the
second month beginning after the Death Benefit Date.
OTHER CONTRACT PROVISIONS
EXERCISE OF CONTRACT RIGHTS
An Individual Contract belongs to the individual to whom the Contract is
issued. A Group Contract belongs to the Owner. In the case of a Group Contract,
the Owner may expressly reserve all Contract rights and privileges; otherwise,
each Participant will be entitled to exercise such rights and privileges. In any
case, such rights and privileges can be exercised without the consent of the
Beneficiary (other than an irrevocably designated Beneficiary) or any other
person. Such rights and privileges may be exercised only during the lifetime of
the Participant before the Annuity Commencement Date, except as the Contract
otherwise provides.
The Annuitant becomes the Payee on and after the Annuity Commencement
Date. The Beneficiary becomes the Payee on the death of the Participant prior to
the Annuity Commencement Date, or on the death of the Annuitant after the
Annuity Commencement Date. Such Payee may thereafter exercise such rights and
privileges, if any, of ownership which continue.
CHANGE OF OWNERSHIP
Ownership of a Qualified Contract may not be transferred except to: (1)
the Annuitant; (2) a trustee or successor trustee of a pension or profit sharing
trust which is qualified under Section 401 of the Internal Revenue Code; (3) the
employer of the Annuitant, provided that the Qualified Contract after transfer
is maintained under the terms of a retirement plan qualified under Section
403(a) of the Internal Revenue Code for the benefit of the Annuitant; (4) the
trustee or custodian of an individual retirement account plan qualified under
Section 408 of the Internal Revenue Code for the benefit of the Participants
under a Group Contract; or (5) as otherwise permitted from time to time by laws
and regulations governing the retirement or deferred compensation plans for
which a Qualified Contract may be issued. Subject to the foregoing, a Qualified
Contract may not be sold, assigned, transferred, discounted or pledged as
collateral for a loan or as security for the performance of an obligation or for
any other purpose to any person other than the Company.
The Owner of a Non-Qualified Contract may change the ownership of the
Contract prior to the last Annuity Commencement Date; and each Participant, in
like manner, may change the ownership interest in a Contract. A change of
ownership will not be binding on us until we receive written notification. When
we receive such notification, the change will be effective as of the date on
which the request for change was signed by the Owner or Participant, as
appropriate, but the change will be without prejudice to us on account of any
payment we make or any action we take before receiving the change. If you change
the Owner of a Non-Qualified Contract, you will become immediately liable for
the payment of taxes on any gain realized under the Contract prior to the change
of ownership, including possible liability for a 10% federal excise tax.
VOTING OF SERIES FUND SHARES
We will vote Series Fund shares held by the Sub-Accounts at meetings of
shareholders of the Series Fund or in connection with similar solicitations, but
will follow voting instructions received from persons having the right to give
voting instructions. During the Accumulation Phase, you will have the right to
give voting instructions, except in the case of a Group Contract where the Owner
has reserved this right. During the Income Phase, the Payee -- that is the
Annuitant or Beneficiary entitled to receive benefits -- is the person having
such voting rights. We will vote any shares attributable to us and Series Fund
shares for which no timely voting instructions are received in the same
proportion as the shares for which we receive instructions from Owners,
Participants and Payees, as applicable.
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Owners of Qualified Contracts issued on a group basis may be subject to
other voting provisions of the particular plan and of the Investment Company Act
of 1940. Employees who contribute to plans that are funded by the Contracts may
be entitled to instruct the Owners as to how to instruct us to vote the Series
Fund shares attributable to their contributions. Such plans may also provide the
additional extent, if any, to which the Owners shall follow voting instructions
of persons with rights under the plans. If no voting instructions are received
from any such person with respect to a particular Participant Account, the Owner
may instruct the Company as to how to vote the number of Series Fund shares for
which instructions may be given.
Neither the Variable Account nor the Company is under any duty to provide
information concerning the voting instruction rights of persons who may have
such rights under plans, other than rights afforded by the Investment Company
Act of 1940, or any duty to inquire as to the instructions received or the
authority of Owners, Participants or others, as applicable, to instruct the
voting of Series Fund shares. Except as the Variable Account or the Company has
actual knowledge to the contrary, the instructions given by Owners under Group
Contracts and Payees will be valid as they affect the Variable Account, the
Company and any others having voting instruction rights with respect to the
Variable Account.
All Series Fund proxy material, together with an appropriate form to be
used to give voting instructions, will be provided to each person having the
right to give voting instructions at least 10 days prior to each meeting of the
shareholders of the Series Fund. We will determine the number of Series Fund
shares as to which each such person is entitled to give instructions as of the
record date set by the Series Fund for such meeting, which is expected to be not
more than 90 days prior to each such meeting. Prior to the Annuity Commencement
Date, the number of Series Fund shares as to which voting instructions may be
given to the Company is determined by dividing the value of all of the Variable
Accumulation Units of the particular Sub-Account credited to the Participant
Account by the net asset value of one Series Fund share as of the same date. On
or after the Annuity Commencement Date, the number of Series Fund shares as to
which such instructions may be given by a Payee is determined by dividing the
reserve held by the Company in the Sub-Account with respect to the particular
Payee by the net asset value of a Series Fund share as of the same date. After
the Annuity Commencement Date, the number of Series Fund shares as to which a
Payee is entitled to give voting instructions will generally decrease due to the
decrease in the reserve.
PERIODIC REPORTS
During the Accumulation Period we will send you, or such other person
having voting rights, at least once during each Account Year, a statement
showing the number, type and value of Accumulation Units credited to your
Account and the Fixed Accumulation Value of your Account, which statement shall
be accurate as of a date not more than 2 months previous to the date of mailing.
These periodic statements contain important information concerning your
transactions with respect to a Contract. It is your obligation to review each
such statement carefully and to report to us, at the address or telephone number
provided on the statement, any errors or discrepancies in the information
presented therein within 60 days of the date of such statement. Unless we
receive notice of any such error or discrepancy from you within such period, we
may not be responsible for correcting the error or discrepancy.
In addition, every person having voting rights will receive such reports
or prospectuses concerning the Variable Account and the Series Fund as may be
required by the Investment Company Act of 1940 and the Securities Act of 1933.
We will also send such statements reflecting transactions in your Account as may
be required by applicable laws, rules and regulations.
Upon request, we will provide you with information regarding fixed and
variable accumulation values.
SUBSTITUTION OF SECURITIES
Shares of any or all Series of the Series Fund may not always be available
for investment under the Contract. We may add or delete Series or other
investment companies as variable investment options under the Contracts. We may
also substitute for the shares held in any Sub-Account shares of
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another Series or shares of another registered open-end investment company or
unit investment trust, provided that the substitution has been approved , if
required, by the SEC. In the event of any substitution pursuant to this
provision, we may make appropriate endorsement to the Contract to reflect the
substitution.
CHANGE IN OPERATION OF VARIABLE ACCOUNT
At our election and subject to any necessary vote by persons having the
right to give instructions with respect to the voting of Series Fund shares held
by the Sub-Accounts, the Variable Account may be operated as a management
company under the Investment Company Act of 1940 or it may be deregistered under
the Investment Company Act of 1940 in the event registration is no longer
required. Deregistration of the Variable Account requires an order by the SEC.
In the event of any change in the operation of the Variable Account pursuant to
this provision, we may make appropriate endorsement to the Contract to reflect
the change and take such other action as may be necessary and appropriate to
effect the change.
SPLITTING UNITS
We reserve the right to split or combine the value of Variable
Accumulation Units, Annuity Units or any of them. In effecting any such change
of unit values, strict equity will be preserved and no change will have a
material effect on the benefits or other provisions of the Contract.
MODIFICATION
Upon notice to the Participant, in the case of an Individual Contract, and
the Owner and Participant(s), in the case of a Group Contract (or the Payee(s)
during the Income Phase), we may modify the Contract if such modification: (i)
is necessary to make the Contract or the Variable Account comply with any law or
regulation issued by a governmental agency to which the Company or the Variable
Account is subject; (ii) is necessary to assure continued qualification of the
Contract under the Internal Revenue Code or other federal or state laws relating
to retirement annuities or annuity contracts; (iii) is necessary to reflect a
change in the operation of the Variable Account or the Sub-Account(s) (See
"Change in Operation of Variable Account"); (iv) provides additional Variable
Account and/or fixed accumulation options; or (v) as may otherwise be in the
best interests of Owners, Participants, or Payees, as applicable. In the event
of any such modification, we may make appropriate endorsement in the Contract to
reflect such modification.
In addition, upon notice to the Owner, we may modify a Group Contract to
change the withdrawal charges, Account Fees, mortality and expense risk charges,
administrative expense charges, the tables used in determining the amount of the
first monthly variable annuity and fixed annuity payments and the formula used
to calculate the Market Value Adjustment, provided that such modification
applies only to Participant Accounts established after the effective date of
such modification. In order to exercise our modification rights in these
particular instances, we must notify the Owner of such modification in writing.
The notice shall specify the effective date of such modification which must be
at least 60 days following the date we mail notice of modification. All of the
charges and the annuity tables which are provided in the Group Contract prior to
any such modification will remain in effect permanently, unless improved by the
Company, with respect to Participant Accounts established prior to the effective
date of such modification.
DISCONTINUANCE OF NEW PARTICIPANTS
We may limit or discontinue the acceptance of new Applications and the
issuance of new Certificates under a Group Contract by giving 30 days prior
written notice to the Owner. This will not affect rights or benefits with
respect to any Participant Accounts established under such Group Contract prior
to the effective date of such limitation or discontinuance.
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<PAGE>
RESERVATION OF RIGHTS
We reserve the right, to the extent permitted by law, to: (1) combine any
2 or more variable accounts; (2) add or delete Series, sub-series thereof or
other investment companies and corresponding Sub-Accounts; (3) add or remove
Guarantee Periods available at any time for election by a Participant; and (4)
restrict or eliminate any of the voting rights of Participants (or Owners) or
other persons who have voting rights as to the Variable Account. Where required
by law, we will obtain approval of changes from Participants or any appropriate
regulatory authority. In the event of any change pursuant to this provision, we
may make appropriate endorsement to the Contract to reflect the change.
RIGHT TO RETURN
If you are not satisfied with your Contract, you may return it by mailing
or delivering it to us at the Annuity Service Mailing Address on the cover of
this Prospectus within 10 days after it was delivered to you. When we receive
the returned Contract, it will be cancelled and we will refund to you your
Account Value at the end of the Valuation Period during which we received it.
However, if applicable state law requires, we will return the full amount of any
Purchase Payment(s) we received. State law may also require us to give you a
longer "free look" period or allow you to return the Contract to your sales
representative.
If you are establishing an Individual Retirement Account ("IRA"), the
Internal Revenue Code requires that we give you a disclosure statement
containing certain information about the Contract and applicable legal
requirements. We must give you this statement on or before the date the IRA is
established. If we give you the disclosure statement before the seventh day
preceding the date the IRA is established, you will not have any right of
revocation under the Code. If we give you the disclosure statement at a later
date, then you may give us a notice of revocation at any time within 7 days
after your Contract Date. Upon such revocation, we will refund your Purchase
Payment(s). This right of revocation with respect to an IRA is in addition to
the return privilege set forth in the preceding paragraph. We allow a
Participant establishing an IRA a "ten day free-look," notwithstanding the
provisions of the Internal Revenue Code.
FEDERAL TAX STATUS
INTRODUCTION
This section describes general federal income tax consequences based upon
our understanding of current federal tax laws. Actual federal tax consequences
may vary depending on, among other things, the type of retirement plan with
which you use a Contract and whether (depending on the site of Contract
issuance) Puerto Rico tax law applies. Also, Congress has the power to enact
legislation affecting the tax treatment of annuity contracts, and such
legislation could apply retroactively to Contracts that you purchased before the
date of enactment. We do not make any guarantee regarding the federal, state, or
local tax status of any Contract or any transaction involving any Contract. You
should consult a qualified tax professional for advice before purchasing a
Contract or executing any other transaction (such as a rollover, distribution,
withdrawal or payment) involving a Contract.
DEDUCTIBILITY OF PURCHASE PAYMENTS
For federal income tax purposes, Purchase Payments made under
Non-Qualified Contracts are not deductible.
PRE-DISTRIBUTION TAXATION OF CONTRACTS
Generally, an increase in the value of a Contract will not give rise to
tax, prior to distribution.
However, corporate (or other non-natural person) Owners of, and
Participants under, a Non-Qualified Contract incur current tax, regardless of
distribution, on Contract value increases. Such current taxation does not apply,
though, to (i) immediate annuities, which the Internal Revenue Code (the "Code")
defines as a single premium contract with an annuity commencement date within
one year of
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<PAGE>
the date of purchase, or (ii) any Contract that the non-natural person holds as
agent for a natural person (such as where a bank or other entity holds a
Contract as trustee under a trust agreement).
The Internal Revenue Service could assert that Owners or Participants
under both Qualified Contracts and Non-Qualified Contracts annually receive a
taxable deemed distribution equal to the cost of any life insurance benefit
under the Contract.
You should note that qualified retirement investments automatically
provide tax deferral regardless of whether the underlying contract is an
annuity.
DISTRIBUTIONS AND WITHDRAWALS FROM NON-QUALIFIED CONTRACTS
The Account Value will include an amount attributable to Purchase
Payments, the return of which is not taxable, and an amount attributable to
investment earnings, the return of which is taxable at ordinary income rates.
The relative portions of a distribution that derive from nontaxable Purchase
Payments and taxable investment earnings depend upon the timing of the
distribution.
If you withdraw less than your entire Account Value under a Non-Qualified
Contract before the Annuity Commencement Date, you must treat the withdrawal
first as a return of investment earnings. You may treat only withdrawals in
excess of the amount of the Account Value attributable to investment earnings as
a return of Purchase Payments. Account Value amounts assigned or pledged as
collateral for a loan will be treated as if withdrawn from the Contract.
If a Payee receives annuity payments under a Non-Qualified Contract after
the Annuity Commencement Date, however, the Payee treats a portion of each
payment as a nontaxable return of Purchase Payments. In general, the nontaxable
portion of such a payment bears the same ratio to the total payment as the
Purchase Payments bear to the Payee's expected return under the Contract. The
remainder of the payment constitutes a taxable return of investment earnings.
Once the Payee has received nontaxable payments in an amount equal to total
Purchase Payments, all future distributions constitute fully taxable ordinary
income. If the Annuitant dies before the Payee recovers the full amount of
Purchase Payments, the Payee may deduct an amount equal to unrecovered Purchase
Payments.
Upon the transfer of a Non-Qualified Contract by gift (other than to the
Participant's spouse), the Participant must treat an amount equal to the Account
Value minus the total amount paid for the Contract as income.
A penalty tax of 10% may apply to taxable cash withdrawals and lump-sum
payments from Non-Qualified Contracts. This penalty will not apply in certain
circumstances, such as distributions pursuant to the death of the Participant or
distributions under an immediate annuity (as defined above), or after age
59 1/2.
DISTRIBUTIONS AND WITHDRAWALS FROM QUALIFIED CONTRACTS
Generally, distributions from a Qualified Contract will constitute fully
taxable ordinary income. Also, a 10% penalty tax will, except in certain
circumstances, apply to distributions prior to age 59 1/2.
Distributions from a Qualified Contract are not subject to current
taxation or a 10% penalty, however, if:
- the distribution is not a hardship distribution or part of a series of
payments for life or for a specified period of 10 years or more (an
"eligible rollover distribution"), and
- the Participant or Payee rolls over the distribution (with or without
actually receiving the distribution) into a qualified retirement plan
eligible to receive the rollover.
Only you or your spouse may elect to roll over a distribution to an
eligible retirement plan.
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<PAGE>
WITHHOLDING
In the case of an eligible rollover distribution (as defined above) from a
Qualified Contract (other than from a Contract issued for use with an individual
retirement account), we (or the plan administrator) must withhold and remit to
the U.S. Government 20% of the distribution, unless the Participant or Payee
elects to make a direct rollover of the distribution to another qualified
retirement plan that is eligible to receive the rollover; however, only you or
your spouse may elect a direct rollover. In the case of a distribution from (i)
a Non-Qualified Contract, (ii) a Qualified Contract issued for use with an
individual retirement account, or (iii) a Qualified Contract where the
distribution is not an eligible rollover distribution, we will withhold and
remit to the U.S. Government a part of the taxable portion of each distribution
unless, prior to the distribution, the Participant or Payee provides us his or
her taxpayer identification number and instructs us (in the manner prescribed)
not to withhold. The Participant or Payee may credit against his or her federal
income tax liability for the year of distribution any amounts that we (or the
plan administrator) withhold.
PURCHASE OF IMMEDIATE ANNUITY CONTRACT AND DEFERRED ANNUITY CONTRACT
You should consider the following information only if you intend to
purchase an immediate annuity contract and a deferred annuity contract together.
We understand that the Treasury Department might reconsider the tax treatment of
annuity payments under an immediate annuity contract (as defined above)
purchased together with a deferred annuity contract. We believe that any adverse
change in the existing tax treatment of such immediate annuity contracts would
not apply to contracts issued before the Treasury Department announces the
change. However, there can be no assurance that the Treasury Department will not
apply any such change retroactively.
INVESTMENT DIVERSIFICATION AND CONTROL
The Treasury Department has issued regulations that prescribe investment
diversification requirements for mutual fund series underlying nonqualified
variable contracts. Contracts must comply with these regulations to qualify as
annuities for federal income tax purposes. Contracts that do not meet the
guidelines are subject to current taxation on annual increases in value. We
believe that each series of the Series Fund complies with these regulations. The
preamble to the regulations states that the Internal Revenue Service may
promulgate guidelines under which an owner's excessive control over investments
underlying the contract will preclude the contract from qualifying as an annuity
for federal tax purposes. We cannot predict whether such guidelines, if in fact
promulgated, will be retroactive. We will take any action (including
modification of the Contract and/or the Variable Account) necessary to comply
with any retroactive guidelines.
TAX TREATMENT OF THE COMPANY AND THE VARIABLE ACCOUNT
As a life insurance company under the Code, we will record and report
operations of the Variable Account separately from other operations. The
Variable Account will not, however, constitute a regulated investment company or
any other type of taxable entity distinct from our other operations. We will not
incur tax on the income of the Variable Account (consisting primarily of
interest, dividends, and net capital gains) if we use this income to increase
reserves under Contracts participating in the Variable Account.
QUALIFIED RETIREMENT PLANS
You may use Qualified Contracts with several types of qualified retirement
plans. Because tax consequences will vary with the type of qualified retirement
plan and the plan's specific terms and conditions, we provide below only brief,
general descriptions of the consequences that follow from using Qualified
Contracts in connection with various types of qualified retirement plans. We
stress that the rights of any person to any benefits under these plans may be
subject to the terms and conditions of the plans themselves, regardless of the
terms of the Qualified Contracts that you are using. These terms and conditions
may include restrictions on, among other things, ownership, transferability,
assignability, contributions and distributions. Owners, Participants, Payees,
Beneficiaries and administrators of
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<PAGE>
qualified retirement plans should consider, with the guidance of a tax adviser,
whether the death benefit payable under the Contract affects the qualified
status of their retirement plan.
PENSION AND PROFIT-SHARING PLANS
Sections 401(a), 401(k) and 403(a) of the Code permit business employers
and certain associations to establish various types of retirement plans for
employees. The Tax Equity and Fiscal Responsibility Act of 1982 eliminated most
differences between qualified retirement plans of corporations and those of
self-employed individuals. Self-employed persons may therefore use Qualified
Contracts as a funding vehicle for their retirement plans, as a general rule.
TAX-SHELTERED ANNUITIES
Section 403(b) of the Code permits public school employees and employees
of certain types of charitable, educational and scientific organizations
specified in Section 501(c)(3) of the Code to purchase annuity contracts and,
subject to certain limitations, exclude the amount of purchase payments from
gross income for tax purposes. The Code imposes restrictions on cash withdrawals
from Section 403(b) annuities.
If the Contracts are to receive tax deferred treatment, cash withdrawals
of amounts attributable to salary reduction contributions (other than
withdrawals of accumulation account value as of December 31, 1988) may be made
only when the Participant attains age 59 1/2, separates from service with the
employer, dies or becomes disabled (within the meaning of Section 72(m)(7) of
the Code). These restrictions apply to (i) any post-1988 salary reduction
contributions, (ii) any growth or interest on post-1988 salary reduction
contributions, and (iii) any growth or interest on pre-1989 salary reduction
contributions that occurs on or after January 1, 1989. It is permissible,
however, to withdraw post-1988 salary reduction contributions in cases of
financial hardship. While the Internal Revenue Service has not issued specific
rules defining financial hardship, we expect that to qualify for a hardship
distribution, the Participant must have an immediate and heavy bona fide
financial need and lack other resources reasonably available to satisfy the
need. Hardship withdrawals (as well as certain other premature withdrawals) will
be subject to a 10% tax penalty, in addition to any withdrawal charge applicable
under the Contracts. Under certain circumstances the 10% tax penalty will not
apply if the withdrawal is for medical expenses.
Under the terms of a particular Section 403(b) plan, the Participant may
be entitled to transfer all or a portion of the Account Value to one or more
alternative funding options. Participants should consult the documents governing
their plan and the person who administers the plan for information as to such
investment alternatives.
INDIVIDUAL RETIREMENT ACCOUNTS
Sections 219 and 408 of the Code permit eligible individuals to contribute
to an individual retirement program, including Simplified Employee Pension
Plans, Employer/Association of Employees Established Individual Retirement
Account Trusts, and Simple Retirement Accounts. Such IRAs are subject to
limitations on contribution levels, the persons who may be eligible, and on the
time when distributions may commence. In addition, certain distributions from
some other types of retirement plans may be placed in an IRA on a tax-deferred
basis. If we sell Contracts for use with IRAs, the Internal Revenue Service or
other agency may impose supplementary information requirements. We will provide
purchasers of the Contracts for such purposes with any necessary information.
You will have the right to revoke the Contract under certain circumstances, as
described in the section of this Prospectus entitled "Right to Return."
ROTH IRAS
Section 408A of the Code permits an individual to contribute to an
individual retirement program called a Roth IRA. Unlike contributions to a
traditional IRA under Section 408 of the Code, contributions to a Roth IRA are
not tax-deductible. Provided certain conditions are satisfied, distributions are
generally tax-free. Like traditional IRAs, Roth IRAs are subject to limitations
on contribution
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<PAGE>
amounts and the timing of distributions. If an individual converts a traditional
IRA into a Roth IRA the full amount of the IRA is included in taxable income.
The Internal Revenue Service and other agencies may impose special information
requirements with respect to Roth IRAs. If and when we make Contracts available
for use with Roth IRAs, we will provide any necessary information.
ADMINISTRATION OF THE CONTRACTS
We perform certain administrative functions relating to the Contracts,
Participant Accounts, and the Variable Account. These functions include, but are
not limited to, maintaining the books and records of the Variable Account and
the Sub-Accounts; maintaining records of the name, address, taxpayer
identification number, Contract number, Participant Account number and type, the
status of each Participant Account and other pertinent information necessary to
the administration and operation of the Contracts; processing Applications,
Purchase Payments, transfers and full and partial withdrawals; issuing Contracts
and Certificates; administering annuity payments; furnishing accounting and
valuation services; reconciling and depositing cash receipts; providing
confirmations; providing toll-free customer service lines; and furnishing
telephonic transfer services.
DISTRIBUTION OF THE CONTRACTS
We offer the Contracts on a continuous basis. The Contracts are sold by
licensed insurance agents in those states where the Contracts may be lawfully
sold. Such agents will be registered representatives of broker-dealers
registered under the Securities Exchange Act of 1934 who are members of the
National Association of Securities Dealers, Inc. and who have entered into
distribution agreements with the Company and the general distributor, Clarendon
Insurance Agency, Inc. ("Clarendon"), One Sun Life Executive Park, Wellesley
Hills, Massachusetts 02481. Clarendon, a wholly-owned subsidiary of the Company,
is registered with the SEC under the Securities Exchange Act of 1934 as a
broker-dealer and is a member of the National Association of Securities Dealers,
Inc.
Commissions and other distribution compensation will be paid by the
Company to the selling agents and will not be more than 7.34% of Purchase
Payments. In addition, after the first Account Year, broker-dealers who have
entered into distribution agreements with the Company may receive an annual
renewal commission of no more than 1.00% of the Participant's Account Value. In
addition to commissions, the Company may, from time to time, pay or allow
additional promotional incentives, in the form of cash or other compensation. We
reserve the right to offer these additional incentives only to certain
broker-dealers that sell or are expected to sell during specified time periods
certain minimum amounts of the Contracts or Certificates or other contracts
offered by the Company. Promotional incentives may change at any time.
Commissions will not be paid with respect to Accounts established for the
personal account of employees of the Company or any of its affiliates, or of
persons engaged in the distribution of the Contracts, or of immediate family
members of such employees or persons. In addition, commissions may be waived or
reduced in connection with certain transactions described in this Prospectus
under the heading "Waivers; Reduced Charges; Credits; Bonus Guaranteed Interest
Rates." The Company began offering the Contracts in 1998. During 1998,
approximately $3,190,367 in commissions was paid to and retained by Clarendon in
connection with the distribution of the Contracts.
PERFORMANCE INFORMATION
From time to time the Variable Account may publish reports to
shareholders, sales literature and advertisements containing performance
information relating to the variable options. This information may include
standardized and non-standardized "Average Annual Total Return," "Cumulative
Growth Rate" and "Compound Growth Rate." We may also advertise "yield" for the
Government Securities Series variable options and the High Yield Series variable
options, and "yield" and "effective yield" for the Money Market Series variable
options.
Average Annual Total Return measures the net income of the variable
options and any realized or unrealized gains or losses of the Series in which it
invests, over the period stated. Average Annual Total Return figures are
annualized and represent the average annual percentage change in the value of
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<PAGE>
an investment in a variable options over that period. Standardized Average
Annual Total Return information covers the period after the Variable Account was
established or, if shorter, the life of the Series. Non-standardized Average
Annual Total Return covers the life of each Series, which may predate the
Variable Account. Cumulative Growth Rate represents the cumulative change in the
value of an investment in the variable option for the period stated, and is
arrived at by calculating the change in the Accumulation Unit Value of a
variable option between the first and the last day of the period being measured.
The difference is expressed as a percentage of the Accumulation Unit Value at
the beginning of the base period. "Compound Growth Rate" is an annualized
measure, calculated by applying a formula that determines the level of return
which, if earned over the entire period, would produce the cumulative return.
Average Annual Total Return figures assume an initial purchase payment of
$1,000 and reflect all applicable withdrawal and Contract charges. The
Cumulative Growth Rate and Compound Growth Rate figures that we advertise do not
reflect withdrawal charges or the Account Fee, although they reflect all
recurring charges. Results calculated without withdrawal and/or certain Contract
charges will be higher. We may also use other types of rates of return that do
not reflect withdrawal and Contract charges.
The performance figures used by the Variable Account are based on the
actual historical performance of the Series Fund for the specified periods, and
the figures are not intended to indicate future performance. For periods before
the date the Contracts became available, we calculate the performance
information for the Sub-Account on a hypothetical basis. To do this, we reflect
deductions of the current Contract fees and charges from the historical
performance of the corresponding Series.
Yield is a measure of the net dividend and interest income earned over a
specific one month or 30-day period (7-day period for the Money Market Series
Sub-Account), expressed as a percentage of the value of the Sub-Account's
Accumulation Units. Yield is an annualized figure, which means that we assume
that the Sub-Account generates the same level of net income over a one-year
period and compound that income on a semi-annual basis. We calculate the
effective yield for the Money Market Series Sub-Account similarly, but include
the increase due to assumed compounding. The Money Market Sub-Account's
effective yield will be slightly higher than its yield as a result of its
compounding effect.
The Variable Account may also from time to time compare its investment
performance to various unmanaged indices or other variable annuities and may
refer to certain rating and other organizations in its marketing materials. More
information on performance and our computations is set forth in the Statement of
Additional Information.
The Company may also advertise the ratings and other information assigned
to it by independent industry ratings organizations. Some of these organizations
are A.M. Best, Moody's Investor's Service, Standard and Poor's Insurance Rating
Services, and Duff and Phelps. Each year A.M. Best reviews the financial status
of thousands of insurers, culminating in the assignment of Best's rating. These
ratings reflect A.M. Best's current opinion of the relevant financial strength
and operating performance of an insurance company in comparison to the norms of
the life/health industry. Best's ratings range from A++ to F. Standard and
Poor's and Duff and Phelps' ratings measure the ability of an insurance company
to meet its obligations under insurance policies it issues. These two ratings do
not measure the insurance company's ability to meet non-policy obligations.
Ratings in general do not relate to the performance of the Sub-Accounts.
We may also advertise endorsements from organizations, individuals or
other parties that recommend the Company or the Contracts. We may occasionally
include in advertisements (1) comparisons of currently taxable and tax deferred
investment programs, based on selected tax brackets; or (2) discussions of
alternative investment vehicles and general economic conditions.
AVAILABLE INFORMATION
The Company and the Variable Account have filed with the SEC registration
statements under the Securities Act of 1933 relating to the Contracts. This
Prospectus does not contain all of the
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<PAGE>
information contained in the registration statements and their exhibits. For
further information regarding the Variable Account, the Company and the
Contracts, please refer to the registration statements and their exhibits.
In addition, the Company is subject to the informational requirements of
the Securities Exchange Act of 1934. We file reports and other information with
the SEC to meet these requirements. You can inspect and copy this information
and our registration statements at the SEC's public reference facilities at the
following locations: WASHINGTON, D.C. -- 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549; CHICAGO, ILLINOIS -- 500 West Madison Street, Chicago,
IL 60661; NEW YORK, NEW YORK -- 7 World Trade Center, 13th Floor, New York, NY
10048. The Washington, D.C. office will also provide copies by mail for a fee.
You may also find these materials on the SEC's website (http:// www.sec.gov).
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Company's Annual Report on Form 10-K for the year ended December 31,
1998 filed with the SEC is incorporated by reference in this Prospectus. Any
statement contained in a document we incorporate by reference is deemed modified
or superceded to the extent that a later filed document, including this
Prospectus, shall modify or supercede that statement. Any statement so modified
or superceded shall not be deemed, except as so modified or superceded, to
constitute part of this Prospectus.
The Company will furnish, without charge, to each person to whom a copy of
this Prospectus is delivered, upon the written or oral request of such person, a
copy of the document referred to above which has been incorporated by reference
in this Prospectus, other than exhibits to such document (unless such exhibits
are specifically incorporated by reference in this Prospectus). Requests for
such document should be directed to the Secretary, Sun Life Assurance Company of
Canada (U.S.), One Sun Life Executive Park, Wellesley Hills, Massachusetts
02481, telephone (800) 225-3950.
ADDITIONAL INFORMATION ABOUT THE COMPANY
BUSINESS OF THE COMPANY
We are engaged in the sale of individual variable life insurance and
individual and group fixed and variable annuities. These contracts are sold in
both the tax qualified and non-tax qualified markets. These products are
distributed through individual insurance agents, insurance brokers and
registered broker-dealers.
The following table sets forth premiums and deposits by major product
categories for each of the last three years. See notes to financial statements
for industry segment information.
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Individual insurance products $ 155,907 $ 204,670 $ 207,845
Retirement products $ 2,194,895 $ 2,204,693 $ 1,834,327
------------ ------------ ------------
$ 2,350,802 $ 2,409,363 $ 2,042,172
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
We have obtained authorization to do business in 48 states, the District
of Columbia and Puerto Rico, and anticipate that we will be authorized to do
business in all states except New York. We have formed a wholly-owned
subsidiary, Sun Life Insurance and Annuity Company of New York, which issues
individual fixed and combination fixed/variable annuity contracts and group life
and long-term disability insurance in New York. Our other active subsidiaries
are Sun Capital Advisers, Inc., a registered investment adviser, Clarendon
Insurance Agency, Inc., a registered broker-dealer that acts as the general
distributor of the Contracts and other annuity and life insurance contracts that
we and our affiliates issue, Sun Life of Canada (U.S.) Distributors, Inc., a
registered broker-dealer and investment adviser, New London Trust, F.S.B., a
federally chartered savings bank, Sun Life Financial Services Limited, which
provides off-shore administrative services to us and our parent, Sun Life
Assurance
37
<PAGE>
Company of Canada ("Sun Life (Canada)"), and Sun Life Information Services
Ireland Limited, an offshore technology center.
We are a wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings,
Inc. ("Life Holdco"). Life Holdco is a wholly-owned subsidiary of Sun Life
Assurance Company of Canada -- U.S. Operations Holdings, Inc. ("U.S. Holdco").
U.S. Holdco is a wholly-owned subsidiary of Sun Life (Canada), 150 King Street
West, Toronto, Ontario, Canada. Sun Life (Canada) is a mutual life insurance
company incorporated pursuant to Act of Parliament of Canada in 1865 and
currently transacts business in all of the Canadian provinces and territories,
in all U.S. states (except New York), and in the District of Columbia, Puerto
Rico, the Virgin Islands, Great Britain, Ireland, Hong Kong, Bermuda and the
Philippines.
SELECTED FINANCIAL DATA
The following selected financial data for the Company should be read in
conjunction with the statutory financial statements of the Company and notes
thereto included in this Prospectus beginning on page [45.]
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
---------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenues
Premiums, annuity deposits and other revenue $ 2,581,463 $ 2,623,629 $ 2,215,322 $ 1,883,901 $ 1,997,525
Net investment income and realized gains 187,208 298,121 310,172 315,966 312,583
----------- ----------- ----------- ----------- -----------
2,768,671 2,921,750 2,525,494 2,199,867 2,310,108
----------- ----------- ----------- ----------- -----------
Benefits and expenses
Policyholder benefits 2,416,950 2,579,104 2,232,528 1,995,208 2,102,290
Other expenses 214,607 206,065 175,342 150,937 186,892
----------- ----------- ----------- ----------- -----------
2,631,557 2,785,169 2,407,870 2,146,145 2,289,182
----------- ----------- ----------- ----------- -----------
Operating gain 137,114 136,581 117,624 53,722 20,926
Federal income tax expense (benefit) 11,713 7,339 (5,400) 17,807 19,469
----------- ----------- ----------- ----------- -----------
Net income $ 125,401 $ 129,242 $ 123,024 $ 35,915 $ 1,457
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Assets $16,902,621 $15,925,357 $13,621,952 $12,359,683 $10,117,822
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Surplus notes $ 565,000 $ 565,000 $ 315,000 $ 650,000 $ 335,000
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
</TABLE>
See Note 1 to financial statements for changes in accounting principles and
reporting.
See discussion in Management's Discussion and Analysis of Financial Conditions
and Results of Operations.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
CAUTIONARY STATEMENT
This Prospectus includes forward looking statements by the Company under
the Private Securities Litigation Reform Act of 1995. These statements are not
matters of historical fact; they relate to such topics as future product sales,
Year 2000 compliance, volume growth, market share, market risk and financial
goals. It is important to understand that these forward-looking statements are
subject to
38
<PAGE>
certain risks and uncertainties that could cause actual results to differ
materially from those that the statements anticipate. These risks and
uncertainties may concern, among other things:
- The Company's ability to identify and address Year 2000 issues
successfully, in a timely manner, and at reasonable cost. They also may
concern the ability of the Company's vendors, suppliers, other service
providers, and customers to successfully address their own Year 2000
issues in a timely manner.
- Heightened competition, particularly in terms of price, product
features, and distribution capability, which could constrain the
Company's growth and profitability.
- Changes in interest rates and market conditions.
- Regulatory and legislative developments.
- Developments in consumer preferences and behavior patterns.
RESULTS OF OPERATIONS
NET INCOME
Net income decreased by $3.8 million to $125.4 million in 1998, reflecting
an increase of $22.5 million in income from operations and a decrease of $26.3
million in net realized capital gains. (In the following discussion, "income
from operations" refers to the statutory statement of operations line item, net
gain from operations after dividends to policyholders and federal income tax and
before realized capital gains.)
Income from operations increased from $102.5 million in 1997 to $125.0
million in 1998, mainly as a result of the following factors:
- A $16.7 million increase, to $31.4 million in 1998, in the income from
operations from the Company's Retirement Products and Services segment.
(This is discussed in the "Retirement Products and Services Segment"
section below.)
- The effect of terminating certain reinsurance agreements with the
Company's ultimate parent. The termination of these agreements was the
predominant factor in the $71.1 million increase in income from
operations for the Company's Individual Insurance segment.
- The effects of the Company's December 1997 reorganization (described in
the "Corporate Segment" section below), as a result of which
Massachusetts Financial Services Company ("MFS") was no longer a
subsidiary of the Company. As a result of this reorganization,
dividends from subsidiaries were lower in 1998 than in 1997 and certain
subsidiary tax benefits were no longer available to the Company. Also
affecting income from operations for the Corporate segment in 1998 was
that income earned on the proceeds of a December 1997 issuance of a
$250 million surplus note was lower than the related interest expense.
Net realized capital gains decreased from $26.7 million in 1997 to $0.4
million in 1998. This change also reflected the Company's reorganization, as a
result of which the Company had a realized capital gain of $21.2 million in
1997.
Net income increased by $6.2 million to $129.2 million in 1997, as
compared to 1996 reflecting a decrease of $15.6 million in income from
operations and an increase of $21.8 million in net realized capital gains.
Income from operations decreased from $118.2 million in 1996 to $102.5
million in 1997, mainly as a result of the following factors:
- A $7.6 million decrease, to $14.7 million, in income from operations
from the Company's Retirement Products and Services segment. (This is
discussed in the "Retirement Products and Services Segment" section
below.)
- An increase of $6.5 million, compared to 1996, in the effects of the
reinsurance arrangements between the Company and its ultimate parent.
39
<PAGE>
- A decrease, by approximately $9 million, in dividends from
subsidiaries, as well as higher taxes and expenses in the Corporate
segment.
As noted above, the $21.9 million increase in net realized capital gains,
from $4.8 million in 1996 to $26.7 million in 1997, was caused mainly by the
December 1997 Company reorganization, as a result of which the Company had a
realized capital gain of $21.2 million in 1997.
INCOME FROM OPERATIONS BY SEGMENT
The Company's income from operations reflects the operations of its three
business segments: the Retirement Products and Services segment, the Individual
Insurance segment and the Corporate segment. The following table provides a
summary:
Income from Operations by Segment*
($ in millions)
<TABLE>
<CAPTION>
% CHANGE
----------------------------
1998 1997 1996 1998/1997 1997/1996
--------- --------- --------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Individual Insurance 89.1 18.0 11.5 395.0% 56.5%
Retirement Products and Services 31.4 14.7 22.3 113.6% (34.1)%
Corporate 4.5 69.8 84.4 (93.6)% (17.3)%
--------- --------- --------- ----- -----
125.0 102.5 118.2 22.0% (13.3)%
--------- --------- --------- ----- -----
--------- --------- --------- ----- -----
</TABLE>
*Before realized capital gains
These results are discussed more fully below.
RETIREMENT PRODUCTS AND SERVICES SEGMENT
The Retirement Products and Services segment focuses on the savings and
retirement needs of those preparing for retirement or those who have already
retired. It primarily markets to upscale consumers in the U.S., selling
individual and group fixed and variable annuities. Its major product lines,
"Regatta" and "Futurity," are combination fixed/variable annuities. In these
combination annuities, contract holders have the choice of allocating payments
either to a fixed account, which provides a guaranteed rate of return, or to
variable accounts. Withdrawals from the Company's fixed account are subject to
market value adjustment. In the variable accounts, the contract holder can
choose from a range of investment options and styles. The return depends upon
investment performance of the options selected. Investment funds available under
Regatta are managed by MFS, an affiliate of the Company. Investment funds
available under Futurity products are managed by several investment managers,
including MFS and Sun Capital Advisers, Inc., a subsidiary of the Company.
The Company distributes these annuity products through a variety of
channels. For the Regatta products, about half are sold through securities
brokers, a further one-fourth through financial institutions, and the remainder
through insurance agents and financial planners. The Futurity products,
introduced in February 1998, are distributed through a dedicated wholesaler
network, including Sun Life of Canada (US) Distributors, Inc., that services
similar distribution channels.
Although new pension products are not currently sold, there has been a
substantial block of group retirement business in-force, including guaranteed
investment contracts ("GICs"), pension plans and group annuities. A significant
portion of these pension contracts are non-surrenderable, with the result that
the Company's liquidity exposure is limited. GICs were marketed directly in the
U.S. through independent managers. In 1997, the Company decided to no longer
market group pension and GIC products.
Following are the major factors affecting the Retirement Products and
Services segment results compared to the prior year:
40
<PAGE>
1998 COMPARED TO 1997:
- A SHIFTING PATTERN IN SALES. Annuity deposits declined by about $27
million, or 1%, to $2.2 billion in 1998. Fixed annuity account deposits
were lower by approximately 7% in 1998, while deposits into variable
annuity accounts have been increasing in total and as a proportion of
total annuity deposits. These trends reflected market conditions and
competitive factors.
Deposits into the Dollar Cost Averaging (DCA) programs, a feature of
the Company's combination fixed/variable annuity products, were a
significant element of account deposits. Under these programs, which
were redesigned in late 1996, deposits are made into the fixed portion
of the annuity contract and receive a bonus rate of interest for the
policy year. During the year, the fixed deposit is systematically
transferred to the variable portion of the contract in equal periodic
installments. DCA deposits overall were flat in 1998 compared to 1997.
This pattern resulted, in part, from heightened competition, as other
companies introduced similar DCA programs within the past year. During
the fourth quarter of 1998, the Company introduced a higher DCA rate
and a new six-month DCA program. DCA deposits for that quarter were
higher, compared to the preceding 1998 quarters.
An increase in variable account deposits in 1998 reflected both the
continuing strong growth in equity markets generally and the continuing
strong performance of the investment funds underlying the Company's
variable annuity products. The continuing strong equity markets, low
interest rate environment, and demographic trends, among other factors,
have increased the demand and market for wealth accumulation products
in the U.S., particularly for variable annuities. These factors have
contributed to the growth in the Company's variable account deposits in
1998, despite heightened competition.
The Company introduced its Futurity line of products in February 1998.
Related deposits represented about 6% of the total for the Retirement
Products and Services segment in 1998, reflecting this recent
introduction. The Company expects that sales for the Futurity product
will continue to increase in the future, based on its beliefs that
market demand is growing for multi-manager variable annuity products,
such as Futurity; that the productivity of Futurity's wholesale
distribution network, established in 1998, will continue to grow; and
that the marketplace will respond favorably to future introductions of
new Futurity products and product enhancements.
- HIGHER FEE INCOME RESULTING FROM HIGHER VARIABLE ANNUITY ACCOUNT
BALANCES. The main factors driving this growth in account balances have
been market appreciation and net deposit activity. This growth has
generated corresponding increases in fee income, since fees are
determined based on the average assets held in these accounts. Fee
income increased by approximately $43 million, or 39%, in 1998.
- WHILE THERE HAS BEEN A SHIFT TO VARIABLE ACCOUNTS FROM THE GENERAL
ACCOUNT, NET INVESTMENT INCOME HAS DECLINED. Net investment income
reflects only income earned on invested assets of the general account.
In 1998, net investment income for the Retirement Products and Services
segment decreased by about $40 million, or 20%, compared to 1997,
mainly as a result of the decline in average invested assets in the
Company's general account. This decline in average general account
assets mainly reflected the shift in deposits in recent years from the
fixed account to variable accounts. It also reflected the Company's
decision in 1997 to no longer market group pension and GIC products.
- LOWER POLICYHOLDER BENEFITS, MAINLY REFLECTING LOWER SURRENDER ACTIVITY
COMPARED TO 1997. During 1997 and into the first half of 1998,
surrender and withdrawal activity was high. This activity primarily
related to a block of separate account contracts that had been issued
seven or more years previously and for which the surrender charge
periods had expired. While variable account surrenders have continued
to rise, general account surrenders have declined. As a result of this
pattern of activity, policyholder benefits (of which surrenders and
withdrawals, the related changes in the liability for premium and other
deposit funds, and related separate
41
<PAGE>
account transfers are the major elements) increased in 1997 and were
lower in 1998. The Company expects that as the separate account block
of business continues to grow, and as a higher proportion of it is no
longer subject to surrender charges, surrenders will tend to increase.
- INVESTMENTS IN TECHNOLOGY AND INFRASTRUCTURE TO ENHANCE ANNUITY
OPERATIONS. As a result of these investments, operational expenses
increased by approximately $12 million, or 25%, in 1998 compared to
1997. These increases reflected three main factors:
(1) HIGHER VOLUMES OF ANNUITY BUSINESS, REQUIRING GREATER
ADMINISTRATIVE SUPPORT. The Company expects that increases in the
volume of its annuity business will continue to have a similar
effect on expenses in the near term.
(2) IMPROVEMENTS TO THE COMPUTER SYSTEMS AND TECHNOLOGY THAT
SUPPORT THE ANNUITY BUSINESS. These improvements involved
information systems supporting the growth of the Company's
in-force business, particularly its combination fixed/variable
annuities. The Company expects to continue to invest in its
systems and technology in the future. The extent and nature of
these investments will depend on the Company's assessments of
the relative costs and benefits of given projects.
(3) COSTS ASSOCIATED WITH THE PRODUCT DESIGN AND IMPLEMENTATION OF
THE NEW FUTURITY MULTI-MANAGER ANNUITY PRODUCT AND THE DEVELOPMENT
OF A NEW PRODUCT WITHIN THE REGATTA PRODUCT LINE. The Company
expects to continue to invest in further product enhancements
in the future.
1997 COMPARED TO 1996:
- STRONG FIXED ACCOUNT DEPOSITS. Fixed account deposits in 1997 were
approximately $650 million, or 240%, higher than in 1996. This increase
resulted mainly from the Company's redesign of its DCA programs in late
1996. The Company benefited at the time from the popularity of its DCA
program features and from the absence of major competitors offering
similar features.
- IN 1997, VARIABLE ANNUITY DEPOSITS WERE ABOUT $200 MILLION, OR 16%,
LOWER THAN IN 1996. This trend reflected heightened competition,
uncertainties in the marketplace regarding the attractiveness of
variable annuities, and customer preferences for depositing into the
DCA programs rather than directly into the variable accounts.
- HIGHER FEE INCOME RESULTING FROM HIGHER VARIABLE ANNUITY ACCOUNT
BALANCES. The main factors driving this growth in account balances were
market appreciation and net deposit activity. This growth generated
corresponding increases in fee income, since fees are determined based
on the average assets held in these accounts.
- DECLINING GENERAL ACCOUNT BALANCES, RESULTING IN DECLINING NET
INVESTMENT INCOME. In 1997, net investment income for the Retirement
Products and Services segment decreased by about 16%, mainly as a
result of a decline in average invested assets in the Company's general
account. This decline in average general account assets mainly
reflected the Company's decision in 1997 to no longer market group
pension and GIC products.
- HIGHER POLICYHOLDER BENEFITS, MAINLY REFLECTING HIGH SURRENDER ACTIVITY
IN 1997. As noted above, surrender and withdrawal activity was high in
1997. This activity primarily related to a block of separate account
contracts that had been issued seven or more years previously and for
which the surrender charge period had expired. As a result of this
pattern of activity, policyholder benefits (of which surrenders and
withdrawals, the related changes in the liability for premium and other
deposit funds, and related separate account transfers are the major
elements) were unusually high in 1997 compared to 1996.
42
<PAGE>
- HIGHER COMMISSIONS. Commissions increased by approximately $22 million,
or 20%, in 1997, directly reflecting higher sales of combination
fixed/variable annuity products in 1997 compared to 1996.
- HIGHER OPERATIONAL EXPENSES. Operational expenses increased by
approximately $5 million, or 13%, as a result of the additional
staffing needed to administer higher volumes of business and because of
non-recurring costs of moving the Retirement Products and Services
operations to a new facility.
INDIVIDUAL INSURANCE SEGMENT
The Individual Insurance segment comprises two main elements: internal
reinsurance and variable life products.
INTERNAL REINSURANCE
In recent years, the Company has had various reinsurance agreements with
its ultimate parent, Sun Life (Canada). In some of these arrangements, Sun Life
(Canada) has reinsured the mortality risks of individual life policies sold in
prior years by the Company. In another agreement, which became effective January
1, 1991 and terminated October 1, 1998, the Company reinsured certain individual
life insurance contracts issued by Sun Life (Canada). The latter agreement had a
significant effect on net income in both 1997 and 1998. The former agreements,
in the aggregate, also affected net income in those years, but to a much lesser
extent. The effects of these agreements on the Company's net income are
summarized in the following table.
INTERNAL REINSURANCE-EFFECT ON INCOME FROM OPERATIONS BEFORE INCOME TAXES
($ IN MILLIONS)
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
1991 Agreement
Effect on operations $ 24.6 $ 37.1 $ 35.2
Effect of termination 65.7 -- --
Other Agreements
Effect on operations (2.1) (1.4) (1.6)
--------- --------- ---------
Total $ 88.2 $ 35.7 $ 33.6
--------- --------- ---------
--------- --------- ---------
</TABLE>
Because the 1991 agreement was in effect only through the first nine
months of 1998, related net income was correspondingly lower in 1998 than in
1997. Also contributing to the lower 1998 net income from operations from this
agreement were proportionately higher death claims in 1998. The effect of
terminating this agreement was to further increase 1998 net income by $65.7
million. Neither the net income effect of this agreement's operations nor that
of its termination will recur. The termination-related increase in 1998
represents a reasonable approximation of the value of the stream of future
earnings that the agreement would have generated had it not been terminated.
VARIABLE LIFE PRODUCTS
This business includes the sale of individual variable life insurance
products, primarily the Company's variable universal life product for the
company-owned life insurance ("COLI") market. This product was introduced in
late 1997. The Company expects the variable life business to grow and become
more significant in the future.
43
<PAGE>
CORPORATE SEGMENT
This segment includes the capital of the Company, its investments in
subsidiaries and items not otherwise attributable to either the Retirement
Products and Services and Individual Insurance segments. In 1998, income from
operations decreased by $65.3 million to $4.5 million for this segment. This
decrease reflected two main factors:
- DIVIDENDS FROM SUBSIDIARIES WERE LOWER THAN IN 1997 BY $37.5 MILLION.
This decrease mainly resulted from a December 1997 reorganization, in
which the Company transferred its ownership of MFS to its parent
company. As a result of this reorganization, the Company received no
dividends from MFS in 1998. By comparison, it received $33.1 million of
MFS dividends in 1997.
- Net investment income other than dividends from subsidiaries, was lower
than in 1997 by $5.9, reflecting the effect of the Company's December
1997 issuance of a $250 million surplus note to its upstream holding
company. Interest expense exceeded investment earnings on the related
funds.
In 1997, income from operations for this segment decreased by $14.6
million, to $69.8 million. This decrease mainly reflected a decrease, by
approximately $9 million, in dividends from subsidiaries. It also reflected
higher taxes and expenses.
FINANCIAL CONDITION AND LIQUIDITY
ASSETS
The Company's total assets comprise those held in its general account and
those held in its separate accounts. General account assets support general
account liabilities. Separate accounts and their assets are of two main types:
- Those assets held in a "fixed" separate account, which the Company
established for amounts that contract holders allocate to the fixed
portion of their combination fixed/variable deferred annuity contracts.
Fixed separate account assets are available to fund general account
liabilities and general account assets are available to fund the
liabilities of this fixed separate account. The Company manages the assets
of this fixed separate account according to general account investment
policy guidelines.
- Those assets held in a number of registered and non-registered "variable"
separate accounts as investment vehicles for the Company's variable life
and annuity contracts. Policyholders may choose from among various
investment options offered under these contracts according to their
individual needs and preferences. Policyholders assume the investment
risks associated with these choices. General account and fixed separate
account assets are not available to fund the liabilities of these variable
accounts.
The following table summarizes significant changes in asset balances
during 1998 and 1997. The changes are discussed below.
<TABLE>
<CAPTION>
ASSETS % CHANGE
1998 1997 1996 1998/1997 1997/1996
---------- ---------- ---------- ------------ ------------
($ IN MILLIONS)
<S> <C> <C> <C> <C> <C>
General account assets $ 2,932.2 $ 4,513.5 $ 4,593.9 (35.0)% (1.75)%
Fixed separate account assets 2,195.6 2,343.9 2,108.8 (6.3)% 11.15%
---------- ---------- ---------- ------ ------
$ 5,127.8 $ 6,857.4 $ 6,702.7 (25.2)% 2.31%
Variable separate account assets 11,774.8 9,068.0 6,919.2 29.9% 31.06%
---------- ---------- ---------- ------ ------
Total assets $ 16,902.6 $ 15,925.4 $ 13,621.9 6.1% 16.91%
---------- ---------- ---------- ------ ------
---------- ---------- ---------- ------ ------
</TABLE>
General account and fixed separate account assets, taken together,
decreased by 25% in 1998, but variable separate account assets increased by 30%
that year. In 1997, growth in the general account and fixed separate account was
low; variable separate account assets increased by 31%. This growth in variable
accounts relative to the general and fixed accounts reflects two main factors:
appreciation of
44
<PAGE>
the funds held in the variable separate accounts has exceeded that of the funds
held in the general and fixed separate accounts; and annuity deposits into
variable accounts have increased, while annuity deposits into fixed accounts
have slowed. The Company believes this pattern reflects a shift in the
preferences of policyholders, which is largely attributable to the strong
performance of equity markets in general and of the Company's variable account
funds in particular.
The assets of the Company's general account are available to support
general account liabilities. For management purposes, it is the Company's
practice to segment its general account to facilitate the matching of assets and
liabilities. General account assets primarily comprise cash and invested assets,
which represented 98.7% of general account assets at year-end 1998. Major types
of invested asset holdings included bonds, mortgages, real estate and common
stock. The Company's bond holdings comprised 60.9% of the Company's portfolio at
year-end 1998. Bonds included both public and private issues. It is the
Company's policy to acquire only investment-grade securities. As a result, the
overall quality of the bond portfolio is high. At year-end 1998, only 5.3% of
these securities were rated below-investment-grade; I.E., they had National
Association of Insurance Commissioners ("NAIC") ratings lower than "1" or "2."
The Company's mortgage holdings amounted to $535.0 million at year-end 1998,
representing 18.5% of the total portfolio. All mortgage holdings at year-end
1998 were in good standing. The Company believes that the high quality of its
mortgage portfolio is largely attributable to its stringent underwriting
standards. At year-end 1998, investment real estate amounted to $78.0 million,
representing about 2.7% of the total portfolio. The Company invests in real
estate to enhance yields and, because of the long-term nature of these
investments, the Company uses them for purposes of matching with products having
long-term liability durations. Common stock holdings amounted to $128.4 million,
representing about 4.4% of the portfolio. These holdings comprised the Company's
ownership shares in subsidiaries.
Other general account assets decreased by $1,021.4 million in 1998. This
change primarily reflected the effect of terminating the internal reinsurance
agreement with the Company's ultimate parent, discussed in "Internal
Reinsurance," above.
LIABILITIES
As with assets, the proportion of variable separate account liabilities to
total liabilities has been increasing. Most of the Company's liabilities
comprise reserves for life insurance and for annuity contracts and deposit
funds. The Company expects the declining trend in general account liabilities to
continue, because it believes that net maturities will continue to exceed sales
for the fixed contracts associated with these liabilities. This trend stems
mainly from the Company's 1997 decision to discontinue selling group pension and
GIC contracts and to focus its marketing efforts on its combination
fixed/variable annuity products.
In December 1997, the Company borrowed $110.0 million from Sun Life
Assurance Company of Canada -- U.S. Operations Holdings, Inc. ("U.S. Holdco"),
its upstream holding company. The Company repaid this note during the first
quarter of 1998.
The termination of the internal reinsurance agreement discussed above
resulted in a $1.0 billion decrease in liabilities as compared to 1997.
CAPITAL MARKETS RISK MANAGEMENT
See "Quantitative and Qualitative Disclosures About Market Risk" below for
a discussion of the Company's capital markets risk management.
CAPITAL RESOURCES
CAPITAL ADEQUACY
The National Association of Insurance Commissioners ("NAIC") adopted
regulations at the end of 1993 that established minimum capitalization
requirements for insurance companies, based on risk-based capital ("RBC")
formulas. These requirements are intended to identify undercapitalized
companies, so that specific regulatory actions can be taken on a timely basis.
The RBC formula for life
45
<PAGE>
insurance companies sets capital requirements related to asset, insurance,
interest rate, and business risks. According to the RBC calculation, the
Company's capital was well in excess of its required capital at year-end 1998.
LIQUIDITY
The Company's liquidity requirements are generally met by funds from
operations. The Company's main uses of funds are to pay out death benefits and
other maturing insurance and annuity contract obligations; to make pay-outs on
contract terminations; to purchase new investments; to fund new business
ventures; and to pay normal operating expenditures and taxes. The Company's main
sources of funds are premiums and deposits on insurance and annuity products;
proceeds from the sale of investments; income from investments; and repayments
of investment principal.
In managing its general account and fixed separate account assets in
relation to its liabilities, the Company has segmented these assets by product
or by groups of products. The Company manages each segment's assets based on an
investment policy that it has established for that segment. Among other matters,
this investment policy considers liquidity requirements and provides cash flow
estimates. The Company reviews these policies quarterly.
The Company's liquidity targets are intended to enable it to meet its
day-to-day cash requirements. On a quarterly basis, the Company compares its
total "liquifiable" assets to its total demand liabilities. Liquifiable assets
comprise cash and assets that could quickly be converted to cash should the need
arise. These assets include short-term investments and other current assets and
investment-grade bonds. The Company's policy is to maintain a liquidity ratio in
excess of 100%, and it did so throughout 1998. Based on its ongoing liquidity
analyses, the Company believes that its available liquidity is more than
sufficient to meet its liquidity needs.
DEMUTUALIZATION
On January 27, 1998, Sun Life (Canada) announced that its Board of
Directors had requested management world-wide to develop a plan to convert from
a mutual life insurance company into a publicly traded stock company through
demutualization worldwide. Management has put in place a full time task force
which, together with a worldwide team of actuarial, financial and legal
advisers, has begun work. The Board will decide later this year whether to
proceed with demutualization, following the completion of the plan.
Demutualization would require regulatory and policyholder approval. Based on
information known to date, the potential demutualization of Sun Life (Canada) is
not expected to have any significant impact on the Company.
YEAR 2000 COMPLIANCE
During the fourth quarter of 1996, the Company, Sun Life (Canada) and
affiliates began a comprehensive analysis of its information technology ("IT")
and non-IT systems, including its hardware, software, data, data feed products,
and internal and external supporting services, to address the ability of these
systems to correctly process date calculations through the year 2000 and beyond.
The Company created a full-time Year 2000 project team in early 1997 to manage
this endeavor across the Company. This team, which works with dedicated
personnel from all business units and with the legal and audit departments,
reports directly to the Company's senior management on a monthly basis. In
addition, the Company's Year 2000 project is periodically reviewed by internal
and external auditors.
To date, relevant systems have been identified and their components
inventoried, needed resolutions have been documented, timelines and project
plans have been developed, and remediation and testing are in process. Over 90%
of the components have been remediated, tested and are certified as Year 2000
compliant. The majority of the remaining components are in the testing phase and
are expected to be certified over the course of this year.
In mid-1997, the project team contacted all key vendors to obtain either
their certification for the products and services provided or their plan to make
those products and services compliant. Approximately 95% of these vendors have
responded and the project team has reviewed the responses
46
<PAGE>
and validated and conducted tests with the vendors where appropriate. In
addition, the project team continues to work with critical business partners,
such as third-party administrators, investment property managers, investment
mortgage correspondents, and others, with the goal that these partners will
continue to be able to support the Company's objective of assuring Year 2000
compliance.
Non-IT applications, including building security, HVAC systems, and other
such systems, will be tested. Compliant client server and mainframe environments
have been built which allow for testing of critical dates such as December
31,1999, January 1, 2000, February 28, 2000, February 29, 2000 and March 1, 2000
without impact to current production.
Although the Company expects all critical systems to be Year 2000
compliant before the end of 1999, there can be no assurance that this result
will be achieved. Factors giving rise to this uncertainty include possible loss
of technical resources to perform the work, failure to identify all susceptible
systems, non-compliance by third-parties whose systems and operations affect the
Company, and other similar uncertainties. A possible worst-case scenario might
include one or more of the Company's significant systems being non-compliant.
Such a scenario could result in material disruption to the Company's operations.
Consequences of such disruptions could include, among other possibilities, the
inability to update customers' accounts, process payments and other financial
transactions; and report accurate data to customers, management, regulators, and
others. Consequences also could include business interruptions or shutdowns,
reputational harm, increased scrutiny by regulators, and litigation related to
Year 2000 issues. Such potential consequences, depending on their nature and
duration, could have a material impact on the Company's results of operations
and financial position.
In order to mitigate the risks to the Company of material adverse
operational or financial impacts from failure to achieve planned Year 2000
compliance, the Company has established contingency planning at the business
unit and corporate levels. Each business unit has ranked its applications as
being of high, medium or low business risk to ensure that the most critical are
addressed first. The business units also have developed alternate plans of
action where possible, and established dates for the alternate plans to be
enacted. On the corporate level, the Company is in the process of enhancing its
business continuation plan by identifying minimum requirements for facilities,
computing, staffing, and other factors, and it is developing a plan to support
those requirements.
As of year-end 1998, the Company had expended, cumulatively, approximately
$4.2 million on its Year 2000 effort, and it expects to incur a further $1.3
million on this effort in 1999.
SALE OF SUBSIDIARY
In February 1999, the Company completed the sale of its wholly-owned
subsidiary, Massachusetts Casualty Insurance Company ("MCIC"), to Centre
Solutions (U.S.) Limited, a wholly-owned subsidiary of Centre Reinsurance
Holdings, Limited, for approximately $34 million. MCIC sold individual
disability insurance throughout the U.S. This transaction is not expected to
have a significant effect on the operations of the Company.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
This discussion covers market risks associated with investment portfolios
that support the Company's general account liabilities. This discussion does not
cover market risks associated with those investment portfolios that support
separate account products. For these products, the policyholder, rather than the
Company, assumes these market risks.
GENERAL
The assets of the Company's general account are available to support
general account liabilities. For purposes of managing these assets in relation
to these liabilities, the Company notionally segments these assets by product or
by groups of products. The Company manages each segment's assets based on an
investment policy that it has established for that segment. The policy covers
the segment's liability characteristics and liquidity requirements, provides
cash flow estimates, and sets targets for asset mix, duration, and quality. Each
quarter, investment and business unit managers review these
47
<PAGE>
policies to ensure that the policies remain appropriate, taking into account
each segment's liability characteristics.
TYPES OF MARKET RISKS
The Company's stringent underwriting standards and practices have resulted
in high-quality portfolios and have the effect of limiting credit risk. It is
the Company's policy, for example, not to purchase below-investment-grade
securities. Also, as a matter of investment policy, the Company assumes no
foreign currency or commodity risk; nor does it assume equity price risk except
to the extent that it holds real estate in its portfolios. (At year-end 1998,
investment real estate holdings represented approximately 3% of its total
general account portfolio.) The management of interest rate risk exposure is
discussed below.
INTEREST RATE RISK MANAGEMENT
The Company's fixed interest rate liabilities are primarily supported by
well diversified portfolios of fixed interest investments. They are also
supported by holdings of real estate and floating rate notes. All of these fixed
interest investments are held for other than trading purposes and can include
publicly issued and privately placed bonds and commercial mortgage loans. Public
bonds can include Treasury bonds, corporate bonds, and money market instruments.
The Company's fixed income portfolios also hold securitized assets, including
mortgage-backed securities (MBS) and asset-backed securities. These securities
are subject to the same standards applied to other portfolio investments,
including relative value criteria and diversification guidelines. In portfolios
backing interest-sensitive liabilities, the Company's policy is to limit MBS
holdings to less than 10% of total portfolio assets. In all portfolios, the
Company restricts MBS investments to pass-through securities issued by U.S.
Government agencies and to collateralized mortgage obligations, which are
expected to exhibit relatively low volatility. The Company does not engage in
leveraged transactions and it does not invest in the more speculative forms of
these instruments such as the interest-only, principal-only, inverse floater, or
residual tranches.
Changes in the level of domestic interest rates affect the market value of
fixed interest assets and liabilities. Segments whose liabilities mainly arise
from the sale of products containing interest rate guarantees for certain terms
are sensitive to changes in interest rates. In these segments, the Company uses
"immunization" strategies, which are specifically designed to minimize the loss
from wide fluctuations in interest rates. The Company supports these strategies
using analytical and modeling software acquired from outside vendors.
Significant features of the Company's immunization models include:
- an economic or market value basis for both assets and liabilities;
- an option pricing methodology;
- the use of effective duration and convexity to measure interest rate
sensitivity; and
- the use of "key rate durations" to estimate interest rate exposure at
different parts of the yield curve and to estimate the exposure to
non-parallel shifts in the yield curve.
The Company's Interest Rate Risk Committee meets monthly. After reviewing
duration analyses, market conditions and forecasts, the Committee develops
specific asset management strategies for the interest-sensitive portfolios.
These strategies may involve managing to achieve small intentional mismatches,
either in terms of total effective duration or for certain key rate durations,
between the liabilities and related assets of particular segments. The Company
manages these mismatches to a tolerance range of plus or minus 0.5.
Asset strategies may include the use of Treasury futures or interest rate
swaps to adjust the duration profiles for particular portfolios. All derivative
transactions are conducted under written operating guidelines and are marked to
market. Total positions and exposures are reported to the Company's Board of
Directors on a monthly basis. The counterparties to hedging transactions are
major highly rated financial institutions, with respect to which the risk of the
Company's incurring losses related to credit exposures is considered remote.
48
<PAGE>
Liabilities categorized as financial instruments and held in the Company's
general account at December 31, 1998 had a fair value of $1,538.3 million. Fixed
income investments supporting those liabilities had a fair value of $2,710.1
million at that date. The Company performed a sensitivity analysis on these
interest-sensitive liabilities and assets at December 31, 1998. The analysis
showed that if there were an immediate increase of 100 basis points in interest
rates, the fair value of the liabilities would show a net decrease of $46.3
million and the corresponding assets would show a net decrease of $113.2
million.
By comparison, liabilities categorized as financial instruments and held
in the Company's general account at December 31, 1997 had a fair value of
$1,986.4 million. Fixed income investments supporting those liabilities had a
fair value of $3,276.2 million at that date. The Company performed a sensitivity
analysis on these interest-sensitive liabilities and assets at December 31,
1997. The analysis showed that if there were an immediate increase of 100 basis
points in interest rates, the fair value of the liabilities would show a net
decrease of $56.0 million and the corresponding assets would show a net decrease
of $108.0 million.
The Company produced these estimates using computer models. Since these
models reflect assumptions about the future, they contain an element of
uncertainty. For example, the models contain assumptions about future
policyholder behavior and asset cash flows. Actual policyholder behavior and
asset cash flows could differ from what the models show. As a result, the
models' estimates of duration and market values may not reflect what actually
will occur. The models are further limited by the fact that they do not provide
for the possibility that management action could be taken to mitigate adverse
results. The Company believes that this limitation is one of conservatism, that
is, it will tend to cause the models to produce estimates that are generally
worse than one might actually expect, all other things being equal.
Based on its processes for analyzing and managing interest rate risk, the
Company believes its exposure to interest rate changes will not materially
affect its near-term financial position, results of operations, or cash flows.
REINSURANCE
The Company has agreements with Sun Life (Canada) which provide that Sun
Life (Canada) will reinsure the mortality risks of the individual life insurance
contracts previously sold by the Company. Under these agreements, basic death
benefits and supplementary benefits are reinsured on a yearly renewable term
basis and coinsurance basis, respectively. Reinsurance transactions under these
agreements in 1998 had the effect of decreasing net income from operations by
$2,128,000.
Effective January 1, 1991 the Company entered into an agreement with Sun
Life (Canada) under which certain individual life insurance contracts issued by
Sun Life (Canada) were reinsured by the Company on a 90% coinsurance basis. Also
effective January 1, 1991, the Company entered into an agreement with Sun Life
(Canada) which provides that Sun Life (Canada) will reinsure the mortality risks
in excess of $500,000 per policy for the individual life insurance contracts
assumed by the Company in the reinsurance agreement described above. Death
benefits are reinsured on a yearly renewable term basis. The life reinsurance
assumed agreement requires the reinsurer to withhold funds in an amount equal to
the reserves assumed. These agreements had the effect of increasing income from
operations by approximately $24,579,000 for the year ended December 31, 1998.
The Company terminated these agreements, effective October 1, 1998, resulting in
an increase in income from operations of $65,679,000, which included a cash
settlement.
The Company has also executed reinsurance agreements with unaffiliated
companies. These agreements provide reinsurance of certain individual life
insurance contracts on a modified coinsurance basis under which all deficiency
reserves are ceded; as well as reinsurance for variable universal life on a
yearly renewable term basis for which the Company has a maximum retention of
$2,000,000.
49
<PAGE>
RESERVES
In accordance with the life insurance laws and regulations under which the
Company operates, it is obligated to carry on its books, as liabilities,
actuarially determined reserves to meet its obligations on its outstanding
contracts. Reserves are based on mortality tables in general use in the United
States and are computed to equal amounts that, with additions from premiums to
be received, and with interest on such reserves compounded annually at certain
assumed rates, will be sufficient to meet the Company's policy obligations at
their maturities or in the event of an insured's death. In the accompanying
Financial Statements, these reserves are determined in accordance with statutory
regulations.
INVESTMENTS
Of the Company's total assets of $16.9 billion at December 31, 1998, 82.7%
($13.98 billion) consisted of unitized and non-unitized separate account assets,
10.4% ($1.76 billion) was invested in bonds and similar securities, 3.2% ($541
million) was invested in mortgages, 0.7 % ($118.3 million) was invested in
subsidiaries, 0.6% ($101.4 million) was invested in real estate, and the
remaining 2.4% ($405.6 million) was invested in cash and other assets.
COMPETITION
The Company is engaged in a business that is highly competitive because of
the large number of stock and mutual life insurance companies and other entities
marketing insurance products. According to a 1998 statistical study, published
by A.M. Best, the Company ranked 37th among North American life insurance
companies based upon total assets as of December 31, 1997. Its ultimate parent
company, Sun Life (Canada), ranked 21st.
EMPLOYEES
The Company and Sun Life (Canada) have entered into a service agreement
which provides that the latter will furnish the Company, as required, with
personnel as well as certain services and facilities on a cost reimbursement
basis. Expenses under this agreement amounted to approximately $16,344,000 in
1998. As of March 31, 1999, the Company had 392 direct employees employed at its
Principal Executive Office in Wellesley Hills, Massachusetts and at its
Retirement Products and Services Division in Boston, Massachusetts.
PROPERTIES
The Company occupies office space owned by it and leased to Sun Life
(Canada), and certain unrelated parties for lease terms not exceeding five
years. The Company also occupies office space which it leases from unaffiliated
parties for various lease terms. Rent received by the Company under the leases
amounted to approximately $6,856,000 in 1998.
STATE REGULATION
The Company is subject to the laws of the State of Delaware governing life
insurance companies and to regulation by the Commissioner of Insurance of
Delaware. An annual statement is filed with the Commissioner of Insurance on or
before March lst in each year relating to the operations of the Company for the
preceding year and its financial condition on December 31st of such year. Its
books and records are subject to review or examination by the Commissioner or
his agents at any time and a full examination of its operations is conducted at
periodic intervals.
The Company is also subject to the insurance laws and regulations of the
other states and jurisdictions in which it is licensed to operate. The laws of
the various jurisdictions establish supervisory agencies with broad
administrative powers with respect to licensing to transact business, overseeing
trade practices, licensing agents, approving policy forms, establishing reserve
requirements, fixing maximum interest rates on life insurance policy loans and
minimum rates for accumulation of surrender values, prescribing the form and
content of required financial statements and regulating the type and amounts of
investments permitted. Each insurance company is required to file detailed
annual reports
50
<PAGE>
with supervisory agencies in each of the jurisdictions in which it does business
and its operations and accounts are subject to examination by such agencies at
regular intervals.
In addition, many states regulate affiliated groups of insurers, such as
the Company, its parent and its affiliates, under insurance holding company
legislation. Under such laws, inter-company transfers of assets and dividend
payments from insurance subsidiaries may be subject to prior notice or approval,
depending on the size of such transfers and payments in relation to the
financial positions of the companies involved.
Under insurance guaranty fund laws in most states, insurers doing business
therein can be assessed (up to prescribed limits) for policyholder losses
incurred by insolvent companies. The amount of any future assessments of the
Company under these laws cannot be reasonably estimated. However, most of these
laws do provide that an assessment may be excused or deferred if it would
threaten an insurer's own financial strength and many permit the deduction of
all or a portion of any such assessment from any future premium or similar taxes
payable.
Although the federal government generally does not directly regulate the
business of insurance, federal initiatives often have an impact on the business
in a variety of ways. Current and proposed federal measures which may
significantly affect the insurance business include employee benefit regulation,
removal of barriers preventing banks from engaging in the insurance business,
tax law changes affecting the taxation of insurance companies, the tax treatment
of insurance products and its impact on the relative desirability of various
personal investment vehicles.
LEGAL PROCEEDINGS
There are no pending legal proceedings affecting the Variable Account. We
and our subsidiaries are engaged in various kinds of routine litigation which,
in management's judgment, is not of material importance to our respective total
assets or material with respect to the Variable Account.
ACCOUNTANTS
The financial statements of the Variable Account for the year ended
December 31, 1998 included in the Statement of Additional Information and the
statutory financial statements of the Company for the years ended December 31,
1998, 1997 and 1996 included in this Prospectus have been audited by Deloitte &
Touche LLP, independent auditors, as stated in their reports appearing herein,
and are included in reliance upon the report of such firm given upon their
authority as experts in accounting and auditing.
FINANCIAL STATEMENTS
The financial statements of the Company which are included in this
Prospectus should be considered only as bearing on the ability of the Company to
meet its obligations with respect to amounts allocated to the Fixed Account and
with respect to the death benefit and the Company's assumption of the mortality
and expense risks. They should not be considered as bearing on the investment
performance of the Series Fund shares held in the Sub-Accounts of the Variable
Account.
The financial statements of the Variable Account for the year ended
December 31, 1998 are included in the Statement of Additional Information.
------------------------
51
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
STATUTORY STATEMENTS OF ADMITTED ASSETS, LIABILITIES AND
CAPITAL STOCK AND SURPLUS
DECEMBER 31, 1998 AND 1997 (IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
ADMITTED ASSETS
Bonds $ 1,763,468 $ 1,910,699
Common stocks 128,445 117,229
Mortgage loans on real estate 535,003 684,035
Properties acquired in satisfaction of debt 17,207 22,475
Investment real estate 78,021 78,426
Policy loans 41,944 40,348
Cash and short-term investments 265,226 544,418
Other invested assets 64,177 55,716
Life insurance premiums and annuity considerations due and uncollected -- 9,203
Investment income due and accrued 35,706 39,279
Federal income tax recoverable and interest thereon 1,110 --
Receivable from parent, subsidiaries and affiliates -- 27,136
Funds withheld on reinsurance assumed -- 982,653
Other assets 1,928 1,842
------------- -------------
General account assets 2,932,235 4,513,459
Separate account assets:
Unitized 11,774,745 9,068,021
Non-unitized 2,195,641 2,343,877
------------- -------------
Total Admitted Assets $ 16,902,621 $ 15,925,357
------------- -------------
------------- -------------
LIABILITIES
Aggregate reserve for life policies and contracts $ 1,216,107 $ 2,188,243
Supplementary contracts 1,885 2,247
Policy and contract claims 369 2,460
Provision for policyholders' dividends and coupons payable -- 32,500
Liability for premium and other deposit funds 1,000,875 1,450,705
Surrender values on cancelled policies 5 215
Interest maintenance reserve 40,490 33,830
Commissions to agents due or accrued 2,615 2,826
General expenses due or accrued 5,932 6,238
Transfers from Separate Accounts due or accrued (361,863) (284,078)
Taxes, licenses and fees due or accrued, excluding FIT 401 105
Federal income taxes due or accrued 25,019 56,384
Unearned investment income 23 34
Amounts withheld or retained by company as agent or trustee 529 47
Remittances and items not allocated 5,176 1,363
Borrowed money -- 110,142
Asset valuation reserve 44,392 47,605
Payable to parent, subsidiaries, and affiliates 30,381 --
Payable for securities 428 27,104
Other liabilities 9,770 2,924
------------- -------------
General account liabilities 2,022,534 3,680,894
Separate account liabilities:
Unitized 11,774,522 9,067,891
Non-unitized 2,195,641 2,343,877
------------- -------------
Total liabilities 15,992,697 15,092,662
------------- -------------
CAPITAL STOCK AND SURPLUS
Common capital stock 5,900 5,900
------------- -------------
Surplus notes 565,000 565,000
Gross paid in and contributed surplus 199,355 199,355
Unassigned funds 139,669 62,440
------------- -------------
Surplus 904,024 826,795
------------- -------------
Total common capital stock and surplus 909,924 832,695
------------- -------------
Total Liabilities, Capital Stock and Surplus $ 16,902,621 $ 15,925,357
------------- -------------
------------- -------------
</TABLE>
SEE NOTES TO STATUTORY FINANCIAL STATEMENTS.
52
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
STATUTORY STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (IN 000'S)
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
INCOME:
Premiums and annuity considerations $ 210,198 $ 254,066 $ 266,942
Deposit-type funds 2,140,604 2,155,297 1,775,230
Considerations for supplementary
contracts without life
contingencies and dividend
accumulations 2,086 1,615 2,340
Net investment income 184,532 270,249 303,753
Amortization of interest maintenance
reserve 2,282 1,166 1,557
Income from fees associated with
investment management and
administration and contract
guarantees from Separate Account 141,211 109,757 83,278
Net gain from operations from
Separate Account -- 5 --
Other income 87,364 102,889 87,532
---------- ---------- ----------
Total 2,768,277 2,895,044 2,520,632
---------- ---------- ----------
BENEFITS AND EXPENSES:
Death benefits 15,335 17,284 12,394
Annuity benefits 153,636 148,135 146,654
Disability benefits and benefits
under accident and health policies 104 132 105
Surrender benefits and other fund
withdrawals 1,933,833 1,854,004 1,507,263
Interest on policy or contract funds (140) 699 2,205
Payments on supplementary contracts
without life contingencies and
dividend accumulations 2,528 1,687 2,120
Increase (decrease) in aggregate
reserves for life and accident and
health policies and contracts (972,135) 127,278 162,678
Decrease in liability for premium
and other deposit funds (449,831) (447,603) (392,348)
Increase (decrease) in reserve for
supplementary contracts without
life contingencies and for
dividend and coupon accumulations (362) 42 327
---------- ---------- ----------
Total 682,968 1,701,658 1,441,398
Commissions on premiums and annuity
considerations (direct business
only) 137,718 132,700 109,894
Commissions and expense allowances
on reinsurance assumed 13,032 17,951 18,910
General insurance expenses 58,132 46,624 37,206
Insurance taxes, licenses and fees,
excluding federal income taxes 7,388 8,267 8,431
Increase (decrease) in loading on
and cost of collection in excess
of loading on deferred and
uncollected premiums (1,663) 523 901
Net transfers to Separate Accounts 722,851 844,130 761,941
Reserve and fund adjustments on
reinsurance terminated 1,017,112 -- --
---------- ---------- ----------
Total 2,637,538 2,751,853 2,378,681
---------- ---------- ----------
Net gain from operations before
dividends to policyholders and
Federal Income Taxes 130,739 143,191 141,951
Dividends to policyholders (5,981) 33,316 29,189
---------- ---------- ----------
Net gain from operations after
dividends to policyholders and
before Federal Income Taxes 136,720 109,875 112,762
Federal income tax expense
(benefit), (excluding tax on
capital gains) 11,713 7,339 (5,400)
---------- ---------- ----------
Net gain from operations after
dividends to policyholders and
federal income taxes and before
realized capital gains 125,007 102,536 118,162
Net realized capital gains less
capital gains tax and transferred
to the IMR 394 26,706 4,862
---------- ---------- ----------
NET INCOME $ 125,401 $ 129,242 $ 123,024
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
SEE NOTES TO STATUTORY FINANCIAL STATEMENTS.
53
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
STATUTORY STATEMENTS OF CHANGES IN CAPITAL STOCK AND SURPLUS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (IN 000'S)
<TABLE>
<CAPTION>
1998 1997 1996
---------- ----------- -----------
<S> <C> <C> <C>
Capital and surplus, Beginning of year $ 832,695 $ 567,143 $ 792,452
---------- ----------- -----------
Net income 125,401 129,242 123,024
Change in net unrealized capital gains (losses) (384) 1,152 (1,715)
Change in non-admitted assets and related items (1,086) (463) 67
Change in reserve on account of change in valuation basis -- 39,016 --
Change in asset valuation reserve 3,213 6,307 (11,812)
Surplus (contributed to) withdrawn from Separate Accounts
during period 82 -- 100
Other changes in surplus in Separate Accounts Statements 10 -- --
Change in surplus notes -- 250,000 (335,000)
Dividends to stockholders (50,000) (159,722) --
Aggregate write-ins for gains and losses in surplus (7) 20 27
---------- ----------- -----------
Net change in capital and surplus for the year 77,229 265,552 (225,309)
---------- ----------- -----------
Capital and surplus, End of year $ 909,924 $ 832,695 $ 567,143
---------- ----------- -----------
---------- ----------- -----------
</TABLE>
SEE NOTES TO STATUTORY FINANCIAL STATEMENTS.
54
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
STATUTORY STATEMENTS OF CASH FLOW
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Cash Provided by Operations:
Premiums, annuity considerations and
deposit funds received $ 2,361,669 $ 2,410,919 $ 2,059,577
Considerations for supplementary
contracts and dividend accumulations
received 2,086 1,615 2,340
Net investment income received 236,944 345,279 324,914
Other income received 253,147 208,223 88,295
----------- ----------- -----------
Total receipts 2,853,846 2,966,036 2,475,126
----------- ----------- -----------
Benefits paid (other than dividends) 2,107,736 2,020,747 1,671,483
Insurance expenses and taxes paid
(other than federal income and
capital gains taxes) 217,023 203,650 172,015
Net cash transferred to Separate
Accounts 800,636 895,465 755,605
Dividends paid to policyholders 26,519 28,316 22,689
Federal income tax payments
(recoveries),(excluding tax on
capital gains) 46,965 1,397 (15,363)
Other--net (138) 698 2,205
----------- ----------- -----------
Total payments 3,198,741 3,150,273 2,608,634
----------- ----------- -----------
Net cash used in operations (344,895) (184,237) (133,508)
----------- ----------- -----------
Proceeds from long-term investments
sold, matured or repaid (after
deducting taxes on capital gains of
$2,038 for 1998, $750 for 1997 and
$1,555 for 1996) 1,261,396 1,343,803 1,768,147
Issuance (repayment) of surplus notes -- 250,000 (335,000)
Other cash provided (used) (40,529) 71,095 147,956
----------- ----------- -----------
Total cash provided 1,220,867 1,664,898 1,581,103
----------- ----------- -----------
Cash Applied:
Cost of long-term investments acquired (967,901) (773,783) (1,318,880)
Other cash applied (187,263) (310,519) (177,982)
----------- ----------- -----------
Total cash applied (1,155,164) (1,084,302) (1,496,862)
Net change in cash and short-term
investments (279,192) 396,359 (49,267)
Cash and short-term investments:
Beginning of year 544,418 148,059 197,326
----------- ----------- -----------
End of year $ 265,226 $ 544,418 $ 148,059
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
SEE NOTES TO STATUTORY FINANCIAL STATEMENTS.
55
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL
Sun Life Assurance Company of Canada (U.S.) (the "Company") is
incorporated as a life insurance company and is currently engaged in the sale of
individual variable life insurance, individual fixed and variable annuities,
group fixed and variable annuities and group pension contracts.
Effective May 1, 1997, the Company became a wholly-owned subsidiary of the
newly established Sun Life of Canada (U.S.) Holdings, Inc. ("Life Holdco"). On
December 18, 1997, Life Holdco became a wholly-owned subsidiary of the Sun Life
Assurance Company of Canada - U.S. Operations Holdings, Inc. ("US Holdco"). US
Holdco is a wholly-owned subsidiary of Sun Life Assurance Company of Canada
("SLOC"). Prior to December 18, 1997, Life Holdco was a direct wholly-owned
subsidiary of SLOC.
The Company, which is domiciled in the State of Delaware, prepares its
financial statements in accordance with statutory accounting practices
prescribed or permitted by the State of Delaware Insurance Department.
Prescribed accounting practices include practices described in a variety of
publications of the National Association of Insurance Commissioners ("NAIC"), as
well as state laws, regulations and general administrative rules. Permitted
accounting practices encompass all accounting practices not so prescribed. The
permitted accounting practices adopted by the Company are not material to the
financial statements. Prior to 1996, statutory accounting practices were
recognized by the insurance industry and the accounting profession as generally
accepted accounting principles for mutual life insurance companies and stock
life insurance companies wholly-owned by mutual life insurance companies. In
April 1993, the Financial Accounting Standards Board ("FASB") issued an
interpretation (the "Interpretation"), that became effective in 1996, which
changed the previous practice of mutual life insurance companies (and stock life
insurance companies that are wholly-owned subsidiaries of mutual life insurance
companies) with respect to utilizing statutory basis financial statements for
general purposes, in that it will no longer allow such financial statements to
be described as having been prepared in conformity with generally accepted
accounting principles ("GAAP"). Consequently, these financial statements
prepared in conformity with statutory accounting practices, as described above,
vary from and are not intended to present the Company's financial position,
results of operations or cash flow in conformity with generally accepted
accounting principles. (See Note 20 for further discussion relative to the
Company's basis of financial statement presentation.) The effects on the
financial statements of the variances between the statutory basis of accounting
and GAAP, although not reasonably determinable, are presumed to be material.
INVESTED ASSETS
Bonds are carried at cost, adjusted for amortization of premium or accrual
of discount. Investments in non-insurance subsidiaries are carried on the equity
basis. Investments in mortgage backed securities are generally carried at
amortized cost. Changes in prepayment assumptions and resulting cash flows are
evaluated periodically. The adjusted yield is used to calculate investment
income in future periods. If current book value exceeds future undiscounted cash
flows, a realized capital loss is recorded and amortized through IMR.
Investments in insurance subsidiaries are carried at their statutory surplus
values. Mortgage loans acquired at a premium or discount are carried at
amortized values and other mortgage loans are carried at the amounts of the
unpaid balances. Real estate investments are carried at the lower of cost,
adjusted for accumulated depreciation or appraised value, less encumbrances.
Short-term investments are carried at amortized cost, which approximates fair
value. Depreciation of buildings and improvements is calculated using the
straight-line method over the estimated useful life of the property, generally
40 to 50 years.
56
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED):
POLICY AND CONTRACT RESERVES
The reserves for life insurance and annuity contracts, developed by
accepted actuarial methods, have been established and maintained on the basis of
published mortality tables using assumed interest rates and valuation methods
that will provide reserves at least as great as those required by law and
contract provisions.
INCOME AND EXPENSES
For life and annuity contracts, premiums are recognized as revenues over
the premium paying period, whereas commissions and other costs applicable to the
acquisition of new business are charged to operations as incurred.
SEPARATE ACCOUNTS
The Company has established unitized separate accounts applicable to
various classes of contracts providing for variable benefits. Contracts for
which funds are invested in separate accounts include variable life insurance
and individual and group qualified and non-qualified variable annuity contracts.
Assets and liabilities of the separate accounts, representing net deposits
and accumulated net investment earnings less fees, held primarily for the
benefit of contract holders, are shown as separate captions in the financial
statements. Assets held in the separate accounts are carried at market value as
determined by quoted market prices of the underlying investments.
The Company has also established a non-unitized separate account for
amounts allocated to the fixed portion of certain combination fixed/variable
deferred annuity contracts. The assets of this account are available to fund
general account liabilities, and general account assets are available to fund
liabilities of this account.
Gains (losses) from mortality experience and investment experience of the
separate accounts, not applicable to contract owners, are transferred to (from)
the general account. Accumulated gains (losses) that have not been transferred
are recorded as a payable (receivable) to (from) the general account. Amounts
payable to the general account of the Company were $361,863,000 in 1998 and
$284,078,000 in 1997.
CHANGES IN ACCOUNTING PRINCIPLES AND REPORTING
As described more fully in Note 10, during 1997 the Company changed
certain assumptions used in determining actuarial reserves.
In March 1998, the National Association of Insurance Commissioners adopted
the Codification of Statutory Accounting Principles ("Codification"). The
Codification, which is intended to standardize regulatory accounting and
reporting for the insurance industry, is proposed to be effective January 1,
2001. However, statutory accounting principles will continue to be established
by individual state laws and permitted practices and it is uncertain when, or
if, the state of Delaware will require adoption of Codification for the
preparation of statutory financial statements. The Company has not finalized the
quantification of the effects of Codification on its statutory financial
statements.
OTHER
Preparation of the financial statements requires management to make
estimates and assumptions that affect reported amounts of assets, liabilities,
revenues and expenses. Actual results could differ from those estimates.
Certain prior year amounts have been reclassified to conform to amounts as
presented in the current year.
57
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
2. INVESTMENTS IN SUBSIDIARIES
The Company owns all of the outstanding shares of Sun Life Insurance and Annuity
Company of New York ("Sun Life (N.Y.)"), Massachusetts Casualty Insurance
Company ("MCIC"), Sun Life of Canada (U.S.) Distributors, Inc. (formerly Sun
Investment Services Company) ("Sundisco"), New London Trust, F.S.B. ("NLT"), Sun
Life Financial Services Limited ("SLFSL"), Sun Benefit Services Company, Inc.
("Sunbesco"), Sun Capital Advisers, Inc. ("Sun Capital"), Sun Life Finance
Corporation ("Sunfinco"), Sun Life of Canada (U.S.) SPE 97-1, Inc. ("SPE 97-1"),
Clarendon Insurance Agency, Inc. ("Clarendon") and Sun Life Information Services
Ireland Ltd. ("SLISL").
On February 5, 1999, the Company finalized the sale of MCIC, a disability
insurance company which issues primarily individual disability income policies,
to Centre Solutions (U.S.) Limited, a wholly-owned subsidiary of Centre
Reinsurance Holdings Limited for approximately $34 million. The impact of this
sale to the ongoing operations of the Company is not expected to be material.
On September 28, 1998, the Company formed SLISL as an offshore technology
center for the purpose of completing systems projects for affiliates.
On October 30, 1997, the Company established a wholly-owned special
purpose corporation, SPE 97-1, for the purpose of engaging in activities
incidental to securitizing mortgage loans.
On December 31, 1997, the Company purchased from Massachusetts Financial
Services ("MFS") all of the outstanding shares of Clarendon, a registered
broker-dealer that acts as the general distributor of certain annuity and life
insurance contracts issued by the Company and its affiliates.
Prior to December 24, 1997, the Company owned 93.6% of the outstanding
shares of MFS. On December 24, 1997, the Company transferred all of its shares
of MFS to Life Holdco in the form of a dividend valued at $159,722,000. As a
result of this transaction, the Company realized a gain of $21,195,000 of
undistributed earnings.
MFS, a registered investment adviser, serves as investment adviser to the
mutual funds in the MFS family of funds as well as certain mutual funds and
separate accounts established by the Company. The MFS Asset Management Group
provides investment advice to substantial private clients.
Sun Life (N.Y.) is engaged in the sale of individual fixed and variable
annuity contracts and group life and disability insurance contracts in the State
of New York.
Sundisco is a registered investment adviser and broker-dealer.
NLT is a federally chartered savings bank.
SLFSL serves as the marketing administrator for the distribution of the
offshore products of Sun Life Assurance Company of Canada (Bermuda), an
affiliate.
Sun Capital is a registered investment adviser.
Sunfinco and Sunbesco are currently inactive.
On September 28, 1998 a $500,000 note was issued by SLISL to the Company
at a rate of 6.0%, maturing on September 28, 2002.
A $110,000,000 note was issued to the Company by MFS on February 11, 1998
at an interest rate of 6.0% due February 11, 1999. Another $110,000,000 note was
issued to the Company by MFS on December 22, 1998 at an interest rate of 5.55%
due February 11, 1999.
On December 23, 1997, the Company issued a $110,000,000 note to US Holdco
at an interest rate of 5.80%, which was repaid on March 1, 1998. A $110,000,000
note was also issued to the
58
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
2. INVESTMENTS IN SUBSIDIARIES (CONTINUED):
Company by MFS on December 23, 1997 at an interest rate of 5.85% and was repaid
on February 11, 1998.
On December 31, 1996, the Company issued a $58,000,000 note to SLOC at an
interest rate of 5.70% which was repaid on February 10, 1997. Also on December
31, 1996, the Company was issued a $58,000,000 note by MFS at an interest rate
of 5.76%. This note was repaid to the Company on February 10, 1997. On December
31, 1998, 1997 and 1996, the Company had an additional $20,000,000 in notes
issued by MFS, scheduled to mature in 2000.
During 1998, 1997, and 1996, the Company contributed capital in the
following amounts to its subsidiaries:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
MCIC -- $ 2,000 $ 10,000
SLFSL $ 750 1,000 1,500
SPE 97-1 -- 20,377 --
Sundisco 10,000 -- --
Sun Capital 500 -- --
Clarendon 10 -- --
SLISL 502 -- --
</TABLE>
Summarized combined financial information of the Company's subsidiaries as
of December 31, 1998, 1997 and 1996 and for the years then ended, follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Intangible assets $ -- $ -- $ 9,646
Other assets 1,315,317 1,190,951 1,376,014
Liabilities (1,186,872) (1,073,966) (1,241,617)
------------- ------------- -------------
Total net assets $ 128,445 $ 116,985 $ 144,043
------------- ------------- -------------
------------- ------------- -------------
Total revenues $ 222,853 $ 750,364 $ 717,280
Operating expenses (221,933) (646,896) (624,199)
Income tax expense (1,222) (43,987) (42,820)
------------- ------------- -------------
Net income (loss) $ (302) $ 59,481 $ 50,261
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
On December 24, 1997, the Company transferred all of its shares of MFS to
its parent, Life Holdco.
59
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
3. BONDS
Investments in debt securities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1998
----------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS (LOSSES) VALUE
------------ ----------- ----------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Long-term bonds:
United States government and government agencies and
authorities $ 140,417 $ 7,635 $ (177) $ 147,875
States, provinces and political subdivisions 16,632 2,219 -- 18,851
Public utilities 397,670 38,740 (238) 436,172
Transportation 197,207 22,481 (18) 219,670
Finance 144,958 12,542 (494) 157,006
All other corporate bonds 866,584 50,814 (6,419) 910,979
------------ ----------- ----------- ------------
Total long-term bonds 1,763,468 134,431 (7,346) 1,890,553
------------ ----------- ----------- ------------
Short-term bonds:
U.S. Treasury Bills, bankers acceptances and commercial
paper 43,400 -- -- 43,400
Affiliates 220,000 -- -- 220,000
------------ ----------- ----------- ------------
Total short-term bonds 263,400 -- -- 263,400
------------ ----------- ----------- ------------
Total bonds $ 2,026,868 $ 134,431 $ (7,346) $ 2,153,953
------------ ----------- ----------- ------------
------------ ----------- ----------- ------------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
----------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS (LOSSES) VALUE
------------ ----------- ----------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Long-term bonds:
United States government and government agencies and
authorities $ 126,923 $ 5,529 $ -- $ 132,452
States, provinces and political subdivisions 22,361 2,095 -- 24,456
Public utilities 398,939 35,338 (91) 434,186
Transportation 214,130 22,000 (390) 235,740
Finance 157,891 5,885 (120) 163,656
All other corporate bonds 990,455 52,678 (5,456) 1,037,677
------------ ----------- ----------- ------------
Total long-term bonds 1,910,699 123,525 (6,057) 2,028,167
------------ ----------- ----------- ------------
Short-term bonds:
U.S. Treasury Bills, bankers acceptances and commercial
paper 431,032 -- -- 431,032
Affiliates 110,000 -- -- 110,000
------------ ----------- ----------- ------------
Total short-term bonds 541,032 -- -- 541,032
------------ ----------- ----------- ------------
Total bonds $ 2,451,731 $ 123,525 $ (6,057) $ 2,569,199
------------ ----------- ----------- ------------
------------ ----------- ----------- ------------
</TABLE>
60
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
3. BONDS (CONTINUED):
The amortized cost and estimated fair value of bonds at December 31, 1998
are shown below by contractual maturity. Expected maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call and/or prepayment penalties.
<TABLE>
<CAPTION>
DECEMBER 31, 1998
--------------------------
AMORTIZED ESTIMATED
COST FAIR VALUE
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Maturities:
Due in one year or less $ 459,631 $ 460,787
Due after one year through five years 329,625 336,516
Due after five years through ten years 264,372 283,840
Due after ten years 703,341 781,253
------------ ------------
1,756,969 1,862,396
Mortgage-backed securities 269,899 291,557
------------ ------------
Total bonds $ 2,026,868 $ 2,153,953
------------ ------------
------------ ------------
</TABLE>
Proceeds from sales and maturities of investments in debt securities
during 1998, 1997, and 1996 were $1,016,811,000, $980,264,000, and
$1,554,016,000, gross gains were $17,025,000, $10,732,000, and $16,975,000 and
gross losses were $866,000, $2,446,000, and $10,885,000, respectively.
Bonds included above with an amortized cost of approximately $2,572,000,
$2,578,000 and $2,060,000 at December 31, 1998, 1997 and 1996, respectively,
were on deposit with governmental authorities as required by law.
Excluding investments in U.S. government and agencies securities, the
Company is not exposed to significant concentration of credit risk in its
portfolio.
4. SECURITIES LENDING
The Company has a securities lending program operated on its behalf by the
Company's primary custodian, Chase Manhattan Bank of New York. The custodian has
indemnified the Company against losses arising from this program. There were no
securities out on loan as of December 31, 1998 and 1997. Income resulting from
this program was $94,000, $200,000 and $137,000 for the years ended December 31,
1998, 1997 and 1996, respectively.
5. MORTGAGE LOANS
The Company invests in commercial first mortgage loans throughout the United
States. The Company monitors the condition of the mortgage loans in its
portfolio. In those cases where mortgages have been restructured, appropriate
allowances for losses have been made. In those cases where, in management's
judgment, the mortgage loans' values are impaired, appropriate losses are
recorded.
61
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
5. MORTGAGE LOANS (CONTINUED):
The following table shows the geographical distribution of the mortgage
loan portfolio.
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1998 1997
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
California $ 82,397 $ 119,122
Massachusetts 53,528 58,981
Michigan 34,357 42,912
New York 21,190 45,696
Ohio 36,171 51,862
Pennsylvania 93,587 97,949
Washington 36,548 54,948
All other 177,225 212,565
---------- ----------
$ 535,003 $ 684,035
---------- ----------
---------- ----------
</TABLE>
The Company has restructured mortgage loans totaling $30,743,000 and
$26,284,000 at December 31, 1998 and 1997, respectively, against which there are
allowances for losses of $2,120,000 and $3,026,000, respectively.
The Company has made commitments of mortgage loans on real estate into the
future.The outstanding commitments for these mortgages amount to $18,005,000 and
$12,300,000 at December 31, 1998 and 1997, respectively.
6. INVESTMENT GAINS AND LOSSES
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------
1998 1997 1996
---------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Net realized gains (losses):
Bonds $ 5,659 $ 2,882 $ 5,631
Common stock of affiliates -- 21,195 --
Common stocks 48
Mortgage loans 2,374 3,837 763
Real estate 955 2,912 599
Other invested assets (3,827) (717) 567
---------- ---------- ---------
Subtotal 5,209 30,109 7,560
Capital gains tax expense 4,815 3,403 2,698
---------- ---------- ---------
Total $ 394 $ 26,706 $ 4,862
---------- ---------- ---------
---------- ---------- ---------
Changes in unrealized gains (losses):
Common stock of affiliates $ (302) $ (2,894) $ (5,739)
Mortgage loans (1,312) 1,524 (600)
Real estate 403 3,377 4,624
Other invested assets 827 (855) --
---------- ---------- ---------
Total $ (384) $ 1,152 $ (1,715)
---------- ---------- ---------
---------- ---------- ---------
</TABLE>
Realized capital gains and losses on bonds and mortgages and interest rate
swaps which relate to changes in levels of interest rates are charged or
credited to an interest maintenance reserve ("IMR") and amortized into income
over the remaining contractual life of the security sold. The net realized
capital
62
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
6. INVESTMENT GAINS AND LOSSES (CONTINUED):
gains credited to the interest maintenance reserve were $8,943,000 in 1998,
$6,321,000 in 1997, and $7,710,000 in 1996. All gains and losses are transferred
net of applicable income taxes.
7. NET INVESTMENT INCOME
Net investment income consisted of:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1998 1997 1996
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Interest income from bonds $ 167,436 $ 188,924 $ 178,695
Income from investment in common stock of affiliates 3,675 41,181 50,408
Interest income from mortgage loans 53,269 76,073 92,591
Real estate investment income 15,932 17,161 16,249
Interest income from policy loans 2,881 3,582 2,790
Other investment income (loss) (641) (193) 1,710
---------- ---------- ----------
Gross investment income 242,552 326,728 342,443
---------- ---------- ----------
Interest on surplus notes and notes payable (44,903) (42,481) (23,061)
Investment expenses (13,117) (13,998) (15,629)
---------- ---------- ----------
Net investment income $ 184,532 $ 270,249 $ 303,753
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
8. DERIVATIVES
The Company uses derivative instruments for interest rate risk management
purposes, including hedges against specific interest rate risk and to minimize
the Company's exposure to fluctuations in interest rates. The Company's use of
derivatives has included U.S. Treasury futures, conventional interest rate
swaps, and forward spread lock interest rate swaps.
In the case of interest rate futures, gains or losses on contracts that
qualify as hedges are deferred until the earliest of the completion of the
hedging transaction, determination that the transaction will no longer take
place, or determination that the hedge is no longer effective. Upon completion
of the hedge, where it is impractical to allocate gains or losses to specific
hedged assets or liabilities, gains or losses are deferred in IMR and amortized
over the remaining life of the hedged assets. At December 31, 1998 and 1997
there were no futures contracts outstanding.
In the case of interest rate and foreign currency swap agreements and
forward spread lock interest rate swap agreements, gains or losses on terminated
swaps are deferred in the IMR and amortized over the shorter of the remaining
life of the hedged asset sold or the remaining term of the swap contract. The
net differential to be paid or received on interest rate swaps is recorded
monthly as interest rates change.
63
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
8. DERIVATIVES (CONTINUED):
Options are used to hedge the stock market interest exposure in the
mortality and expense risk charges and guaranteed minimum death benefit features
of the Company's variable annuities. The Company's open positions are as
follows:
<TABLE>
<CAPTION>
SWAPS OUTSTANDING
AT DECEMBER 31, 1998
---------------------------------
NOTIONAL MARKET VALUE
PRINCIPAL AMOUNTS OF POSITIONS
------------------ -------------
(IN THOUSANDS)
<S> <C> <C>
Conventional interest rate swaps $ 45,000 $ 508
Foreign currency swap 1,178 263
</TABLE>
<TABLE>
<CAPTION>
SWAPS OUTSTANDING
AT DECEMBER 31, 1997
---------------------------------
NOTIONAL MARKET VALUE
PRINCIPAL AMOUNTS OF POSITIONS
------------------ -------------
(IN THOUSANDS)
<S> <C> <C>
Conventional interest rate swaps $ 80,000 $ (2,891)
Foreign currency swap 1,700 208
Forward spread lock swaps 50,000 274
Asian Put Option S & P 500 75,000 693
</TABLE>
The market value of swaps is the estimated amount that the Company would
receive or pay on termination or sale, taking into account current interest
rates and the current credit worthiness of the counterparties. The Company is
exposed to potential credit loss in the event of nonperformance by
counterparties. The counterparties are major financial institutions and
management believes that the risk of incurring losses related to credit risk is
remote.
9. LEVERAGED LEASES
The Company is a lessor in a leveraged lease agreement entered into on October
21, 1994, under which equipment having an estimated economic life of 25-40 years
was leased for a term of 9.75 years. The Company's equity investment represented
22.9% of the purchase price of the equipment. The balance of the purchase price
was furnished by third-party long-term debt financing, collateralized by the
equipment and non-recourse to the Company. At the end of the lease term, the
Master Lessee may exercise a fixed price purchase option to purchase the
equipment.
64
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
9. LEVERAGED LEASES (CONTINUED):
The Company's net investment in leveraged leases is composed of the
following elements:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1998 1997
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Lease contracts receivable $ 78,937 $ 92,605
Less non-recourse debt (78,920) (92,589)
---------- ----------
17 16
Estimated residual value of leased assets 41,150 41,150
Less unearned and deferred income (8,932) (10,324)
---------- ----------
Investment in leveraged leases 32,235 30,842
Less fees (138) (163)
---------- ----------
Net investment in leveraged leases $ 32,097 $ 30,679
---------- ----------
---------- ----------
</TABLE>
The net investment is included in "other invested assets" on the balance
sheet.
10. REINSURANCE
The Company has agreements with SLOC which provide that SLOC will reinsure the
mortality risks of the individual life insurance contracts sold by the Company.
Under these agreements basic death benefits and supplementary benefits are
reinsured on a yearly renewable term basis and coinsurance basis, respectively.
Reinsurance transactions under these agreements had the effect of decreasing
income from operations by approximately $2,128,000, $1,381,000 and $1,603,000
for the years ended December 31, 1998, 1997 and 1996, respectively.
Effective January 1, 1991, the Company entered into an agreement with SLOC
under which certain individual life insurance contracts issued by SLOC were
reinsured by the Company on a 90% coinsurance basis. During 1997 SLOC changed
certain assumptions used in determining the gross and the ceded reserve balance.
The Company reflected the effect of the changes in assumptions to its assumed
reserves as a direct credit to surplus. The effect of the change was a
$39,016,000 decrease in reserves. Also, the agreement required SLOC to reinsure
the mortality risks in excess of $500,000 per policy for the individual life
insurance contracts assumed by the Company. Such death benefits are reinsured on
a yearly renewable term basis. The life reinsurance assumed agreement required
the reinsurer to withhold funds in amounts equal to the reserves assumed. These
agreements had the effect of increasing income from operations by approximately
$24,579,000, $37,050,000 and $35,161,000 for the years ended December 31, 1998,
1997 and 1996, respectively. The Company terminated this agreement effective
October 1, 1998, resulting in an increase in income from operations of
$65,679,000 which included a cash settlement.
65
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
10. REINSURANCE (CONTINUED):
The following are summarized pro-forma results of operations of the
Company for the years ended December 31, 1998, 1997 and 1996 before the effect
of reinsurance transactions with SLOC:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
1998 1997 1996
------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Income:
Premiums, annuity deposits and other revenues $ 2,377,364 $ 2,340,733 $ 1,941,423
Net investment income and realized gains 187,208 298,120 310,172
------------ ------------ ------------
Subtotal 2,564,572 2,638,853 2,251,595
------------ ------------ ------------
Benefits and Expenses:
Policyholder benefits 2,312,247 2,350,354 2,011,998
Other expenses 203,238 187,591 155,531
------------ ------------ ------------
Subtotal 2,515,485 2,537,945 2,167,529
------------ ------------ ------------
Income from operations $ 49,087 $ 100,908 $ 84,066
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
The Company has an agreement with an unrelated company which provides
reinsurance of certain individual life insurance contracts on a modified
coinsurance basis and under which all deficiency reserves related to these
contracts are reinsured. Reinsurance transactions under this agreement had the
effect of increasing income from operations by $3,008,000 in 1998, and
decreasing income from operations by $2,658,000 in 1997 and $46,000 in 1996.
11. WITHDRAWAL CHARACTERISTICS OF ANNUITY ACTUARIAL RESERVES AND DEPOSIT
LIABILITIES
The withdrawal characteristics of general account and separate account annuity
reserves and deposits are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1998
-----------------------------
AMOUNT % OF TOTAL
------------- --------------
(IN THOUSANDS)
<S> <C> <C>
Subject to discretionary withdrawal-with adjustment:
With market value adjustment $ 2,896,529 19
At book value less surrender charges (surrender charge >5%) 10,227,212 66
At book value (minimal or no charge or adjustment) 1,264,453 8
Not subject to discretionary withdrawal provision 1,106,197 7
------------- ---
Total annuity actuarial reserves and deposit liabilities $ 15,494,391 100
------------- ---
------------- ---
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------------------
AMOUNT % OF TOTAL
------------- --------------
(IN THOUSANDS)
<S> <C> <C>
Subject to discretionary withdrawal-with adjustment:
With market value adjustment $ 3,415,394 25
At book value less surrender charges (surrender charge >5%) 7,672,211 57
At book value (minimal or no charge or adjustment) 1,259,698 9
Not subject to discretionary withdrawal provision 1,164,651 9
------------- ---
Total annuity actuarial reserves and deposit liabilities $ 13,511,954 100
------------- ---
------------- ---
</TABLE>
66
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
12. SEGMENT INFORMATION
The Company offers financial products and services such as fixed and variable
annuities, retirement plan services and life insurance on an individual basis.
Within these areas, the Company conducts business principally in two operating
segments and maintains a corporate segment to provide for the capital needs of
the various operating segments and to engage in other financing related
activities.
The Individual Insurance segment markets and administers a variety of life
insurance products sold to individuals and corporate owners of individual life
insurance. The products include whole life, universal life and variable life
products.
The Retirement Products and Services ("RPS") segment markets and
administers individual and group variable annuity products, individual and group
fixed annuity products which include market value adjusted annuities, and other
retirement benefit products.
The following amounts pertain to the various business segments:
<TABLE>
<CAPTION>
FEDERAL
TOTAL TOTAL PRETAX INCOME TOTAL
(IN THOUSANDS) REVENUES EXPENDITURES* INCOME TAXES ASSETS
- --------------------------------------- ----------- -------------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
1998
Individual Insurance $ 229,710 $ 144,800 $ 84,910 $ (4,148) $ 199,683
RPS 2,527,608 2,483,715 43,893 12,486 16,123,905
Corporate 10,959 3,042 7,917 3,375 579,033
----------- -------------- --------- --------- ----------
Total $2,768,277 $2,631,557 $ 136,720 $ 11,713 $16,902,621
----------- -------------- --------- --------- ----------
1997
Individual Insurance 304,141 272,333 31,808 13,825 1,143,697
RPS 2,533,006 2,507,591 25,414 10,667 14,043,221
Corporate 57,897 5,244 52,653 (17,153) 738,439
----------- -------------- --------- --------- ----------
Total $2,895,044 $2,785,169 $ 109,875 $ 7,339 $15,925,357
----------- -------------- --------- --------- ----------
1996
Individual Insurance 281,309 255,846 25,463 13,931 817,115
RPS 2,174,602 2,151,126 23,476 1,203 12,057,572
Corporate 64,721 898 63,823 (20,534) 689,266
----------- -------------- --------- --------- ----------
Total $2,520,632 $2,407,870 $ 112,762 $ (5,400) $13,563,953
----------- -------------- --------- --------- ----------
</TABLE>
- ------------------------
* Total expenditures include dividends to policyholders of $(5,981) for 1998,
$33,316 for 1997 and $29,189 for 1996.
13. RETIREMENT PLANS
The Company participates with SLOC in a noncontributory defined benefit pension
plan covering essentially all employees. The benefits are based on years of
service and compensation.
The funding policy for the pension plan is to contribute an amount which
at least satisfies the minimum amount required by ERISA; currently, the plan is
fully funded. The Company is charged for its share of the pension cost based
upon its covered participants. Pension plan assets consist principally of
separate accounts of SLOC.
The Company's share of the group's accrued pension cost was $1,178,000 and
$593,000 at December 31, 1998 and 1997, respectively. The Company's share of net
periodic pension cost was $586,000, $146,000 and $27,000, for 1998, 1997 and
1996, respectively.
67
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
13. RETIREMENT PLANS (CONTINUED):
The Company also participates with SLOC and certain affiliates in a 401(k)
savings plan for which substantially all employees are eligible. The Company
matches, up to specified amounts, employees' contributions to the plan. Company
contributions were $231,000, $259,000 and $233,000 for the years ended December
31, 1998, 1997 and 1996, respectively.
OTHER POST-RETIREMENT BENEFIT PLANS
In addition to pension benefits the Company provides certain health,
dental, and life insurance benefits ("post-retirement benefits") for retired
employees and dependents. Substantially all employees may become eligible for
these benefits if they reach normal retirement age while working for the
Company, or retire early upon satisfying an alternate age plus service
condition. Life insurance benefits are generally set at a fixed amount.
Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 106, "Employer's Accounting for Postretirement
Benefits Other Than Pensions." SFAS No. 106 requires an accrual of the estimated
cost of retiree benefit payments during the years the employee provides
services. SFAS No. 106 allows recognition of the cumulative effect of the
liability in the year of adoption or the amortization of the obligation over a
period of up to 20 years. The obligation of approximately $455,000 is recognized
over a period of ten years. The Company's cash flows are not affected by
implementation of this standard, but implementation decreased net income by
$95,000, $117,000, and $8,000 for the years ended December 31, 1998, 1997, and
1996, respectively. The Company's post retirement health, dental and life
insurance benefits currently are not funded.
68
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
13. RETIREMENT PLANS (CONTINUED):
OTHER POST-RETIREMENT BENEFIT PLANS CONTINUED
The following table sets forth the change in the pension and other
postretirement benefit plans' benefit obligations and assets as well as the
plans' funded status reconciled with the amount shown in the Company's financial
statements at December 31:
<TABLE>
<CAPTION>
PENSION BENEFITS OTHER BENEFITS
1998 1997 1998 1997
---------- ---------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Change in benefit obligation:
Benefit obligation at beginning of year $ 79,684 $ 70,848 $ 9,845 $ 9,899
Service cost 4,506 4,251 240 306
Interest cost 6,452 5,266 673 725
Amendments -- 1,000 -- --
Actuarial loss (gain) 21,975 -- 308 (801)
Benefits paid (1,825) (1,681) (647) (284)
---------- ---------- ---------- ---------
Benefit obligation at end of year $ 110,792 $ 79,684 $ 10,419 $ 9,845
---------- ---------- ---------- ---------
---------- ---------- ---------- ---------
The Company's share:
Benefit obligation at beginning of year $ 5,094 $ 4,529 $ 385 $ 384
Benefit obligation at end of year $ 9,125 $ 5,094 $ 416 $ 385
Change in plan assets:
Fair value of plan assets at beginning of year $ 136,610 $ 122,807 $ -- $ --
Actual return on plan assets 16,790 15,484 -- --
Employer contribution -- -- 647 284
Benefits paid (1,825) (1,681) (647) (284)
---------- ---------- ---------- ---------
Fair value of plan assets at end of year $ 151,575 $ 136,610 $ -- $ --
---------- ---------- ---------- ---------
---------- ---------- ---------- ---------
Funded status $ 40,783 $ 56,926 $ (10,419) $ (9,845)
Unrecognized net actuarial gain (loss) (2,113) (18,147) 586 257
Unrecognized transition obligation (asset) (24,674) (26,730) 185 230
Unrecognized prior service cost 7,661 8,241 -- --
---------- ---------- ---------- ---------
Prepaid (accrued) benefit cost $ 21,657 $ 20,290 $ (9,648) $ (9,358)
---------- ---------- ---------- ---------
---------- ---------- ---------- ---------
The Company's share of accrued benefit cost $ (1,178) $ (593) $ (195) $ (102)
Weighted-average assumptions as of December 31:
Discount rate 6.75% 7.50% 6.75% 7.50%
Expected return on plan assets 8.00% 7.50% N/A N/A
Rate of compensation increase 4.50% 4.50% N/A N/A
</TABLE>
69
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
13. RETIREMENT PLANS (CONTINUED):
For measurement purposes, a 10.1% annual rate of increase in the per
capita cost of covered health care benefits was assumed for 1998 (5.7% for
dental benefits). The rates were assumed to decrease gradually to 5% for 2005
and remain at that level thereafter.
<TABLE>
<CAPTION>
1998 1997 1998 1997
---------- --------- --------- ---------
<S> <C> <C> <C> <C>
Components of net periodic benefit cost:
Service cost $ 4,506 $ 4,251 $ 240 $ 306
Interest cost 6,452 5,266 673 725
Expected return on plan assets (10,172) (9,163) -- --
Amortization of transition obligation (asset) (2,056) (2,056) 45 45
Amortization of prior service cost 580 517 -- --
Recognized net actuarial (gain) loss (677) (789) (20) 71
---------- --------- --------- ---------
Net periodic benefit cost $ (1,367) $ (1,974) $ 938 $ 1,147
---------- --------- --------- ---------
---------- --------- --------- ---------
The Company's share of net periodic benefit cost $ 586 $ 146 $ 95 $ 117
---------- --------- --------- ---------
---------- --------- --------- ---------
</TABLE>
Assumed health care cost trend rates have a significant effect on the
amounts reported for the health care plans. A one-percentage-point change in
assumed health care cost trend rates would have the following effects:
<TABLE>
<CAPTION>
1-PERCENTAGE-POINT 1-PERCENTAGE-POINT
INCREASE DECREASE
------------------- -------------------
(IN THOUSANDS)
<S> <C> <C>
Effect on total of service and interest cost components $ 210 $ (170)
Effect on postretirement benefit obligation 2,026 (1,697)
</TABLE>
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the carrying amounts and estimated fair values of
the Company's financial instruments at December 31, 1998 and 1997:
<TABLE>
<CAPTION>
DECEMBER 31, 1998
---------------------------------------
CARRYING AMOUNT ESTIMATED FAIR VALUE
----------------- --------------------
(IN THOUSANDS)
<S> <C> <C>
ASSETS:
Bonds $ 2,026,868 $ 2,153,953
Mortgages 535,003 556,143
Derivatives -- 771
LIABILITIES:
Insurance reserves $ 121,100 $ 121,100
Individual annuities 274,448 271,849
Pension products 1,104,489 1,145,351
<CAPTION>
DECEMBER 31, 1997
---------------------------------------
CARRYING AMOUNT ESTIMATED FAIR VALUE
----------------- --------------------
(IN THOUSANDS)
<S> <C> <C>
ASSETS:
Bonds $ 2,451,731 $ 2,569,199
Mortgages 684,035 706,975
LIABILITIES:
Insurance reserves $ 123,128 $ 123,128
Individual annuities 307,668 302,165
Pension products 1,527,433 1,561,108
Derivatives -- (1,716)
</TABLE>
70
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
14. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED):
The major methods and assumptions used in estimating the fair values of
financial instruments are as follows:
The fair values of short-term bonds are estimated to be the amortized
cost. The fair values of long-term bonds which are publicly traded are based
upon market prices or dealer quotes. For privately placed bonds, fair values are
estimated by taking into account prices for publicly traded bonds of similar
credit risk and maturity and repayment and liquidity characteristics.
The fair values of the Company's general account insurance reserves and
liabilities under investment-type contracts (insurance, annuity and pension
contracts that do not involve mortality or morbidity risks) are estimated using
discounted cash flow analyses or surrender values. Those contracts that are
deemed to have short-term guarantees have a carrying amount equal to the
estimated market value.
The fair values of mortgages are estimated by discounting future cash
flows using current rates at which similar loans would be made to borrowers with
similar credit ratings and for the same remaining maturities.
The fair values of derivative financial instruments are estimated using
the process described in Note 8.
15. STATUTORY INVESTMENT VALUATION RESERVES
The asset valuation reserve ("AVR") provides a reserve for losses from
investments in bonds, stocks, mortgage loans, real estate and other invested
assets with related increases or decreases being recorded directly to surplus.
Realized capital gains and losses on bonds and mortgages which relate to
changes in levels of interest rates are charged or credited to an interest
maintenance reserve ("IMR") and amortized into income over the remaining
contractual life of the security sold.
The table shown below presents changes in the major elements of the AVR
and IMR.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1998 1997
-------------------- --------------------
AVR IMR AVR IMR
--------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Balance, beginning of year $ 47,605 $ 33,830 $ 53,911 $ 28,675
Net realized investment gains, net of tax 256 8,942 17,400 6,321
Amortization of net investment gains -- (2,282) -- (1,166)
Unrealized investment losses (6,550) -- (2,340) --
Required by formula 3,081 -- (21,366) --
--------- --------- --------- ---------
Balance, end of year $ 44,392 $ 40,490 $ 47,605 $ 33,830
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
16. FEDERAL INCOME TAXES
The Company and its subsidiaries file a consolidated federal income tax return.
Federal income taxes are calculated for the consolidated group based upon
amounts determined to be payable as a result of operations within the current
year. No provision is recognized for timing differences which may exist between
financial statement and taxable income. Such timing differences include
reserves, depreciation and accrual of market discount on bonds. Cash payments
for federal income taxes were approximately $48,144,000, $31,000,000 and
$19,264,000 for the years ended December 31, 1998, 1997 and 1996, respectively.
The Company is currently undergoing an audit by the Internal Revenue Service.
The Company believes that there will be no material audit adjustments for the
periods under examination.
71
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
17. SURPLUS NOTES AND NOTES RECEIVABLE (PAYABLE)
On December 22, 1997, the Company issued a $250,000,000 surplus note to Life
Holdco. This note has an interest rate of 8.625% and is due on or after November
6, 2027.
On May 9, 1997, the Company issued a short-term note of $600,000,000 to
Life Holdco at an interest rate of 5.10%, which was extended at various interest
rates. This note was repaid on December 22, 1997.
On December 19, 1995, the Company issued surplus notes totaling
$315,000,000 to an affiliate, Sun Canada Financial Co., at interest rates
between 5.75% and 7.25%. Of these notes, $157,500,000 will mature in the year
2007 and $157,500,000 will mature in the year 2015. Interest on these notes is
payable semiannually.
Principal and interest on surplus notes are payable only to the extent
that the Company meets specified requirements regarding free surplus exclusive
of the principal amount and accrued interest, if any, on these notes and with
the consent of the Delaware Insurance Commissioner.
The Company accrued $4,259,000 and $ 964,000 for interest on surplus notes
for the years ended December 31, 1998 and 1997, respectively.
The Company accrued $4,259,000 and $964,000 for interest on surplus notes
for the years ended December 31, 1998 and 1997, respectively.
The Company expensed $44,903,000, $42,481,000 and $23,061,000 for interest
on surplus notes and notes payable for the years ended December 31, 1998, 1997
and 1996, respectively.
18. TRANSACTIONS WITH AFFILIATES
The Company has an agreement with SLOC which provides that SLOC will furnish, as
requested, personnel as well as certain services and facilities on a
cost-reimbursement basis. Expenses under this agreement amounted to
approximately $16,344,000 in 1998, $15,997,000 in 1997, and $20,192,000 in 1996.
The Company leases office space to SLOC under lease agreements with terms
expiring in September, 1999 and options to extend the terms for each of thirteen
successive five-year terms at fair market rental not to exceed 125% of the fixed
rent for the term which is ending. Rent received by the Company under the leases
for 1998 amounted to approximately $6,856,000.
19. RISK-BASED CAPITAL
Effective December 31, 1993, the NAIC adopted risk-based capital requirements
for life insurance companies. The risk-based capital requirements provide a
method for measuring the minimum acceptable amount of adjusted capital that a
life insurer should have, as determined under statutory accounting practices,
taking into account the risk characteristics of its investments and products.
The Company has met the minimum risk-based capital requirements at December 31,
1998, 1997 and 1996.
20. ACCOUNTING POLICIES AND PRINCIPLES
The financial statements of the Company have been prepared on the basis of
statutory accounting practices which, prior to 1996, were considered by the
insurance industry and the accounting profession to be in accordance with GAAP
for mutual life insurance companies. The primary differences between statutory
accounting practices and GAAP are described as follows. Under statutory
accounting practices, financial statements are not consolidated and investments
in subsidiaries are shown at net equity value. Accordingly, the assets,
liabilities and results of operations of the Company's subsidiaries are not
consolidated with the assets, liabilities and results of operations,
respectively, of the Company. Changes
72
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
20. ACCOUNTING POLICIES AND PRINCIPLES (CONTINUED):
in net equity value of the common stock of the Company's United States life
insurance subsidiaries are directly reflected in the Company's surplus. Changes
in the net equity value of the common stock of all other subsidiaries are
directly reflected in the Company's Asset Valuation Reserve. Dividends paid by
subsidiaries to the Company are included in the Company's net investment income.
Other differences between statutory accounting practices and GAAP include
the following: statutory accounting practices do not recognize the following
assets or liabilities which are reflected under GAAP: deferred policy
acquisition costs, deferred federal income taxes and statutory nonadmitted
assets. Asset Valuation Reserves and Interest Maintenance Reserves are
established under statutory accounting practices but not under GAAP. Methods for
calculating real estate depreciation and investment valuation allowances differ
under statutory accounting practices and GAAP. Actuarial assumptions and
reserving methods differ under statutory accounting practices and GAAP. Premiums
for universal life and investment-type products are recognized as income for
statutory purposes and as deposits to policyholders' accounts for GAAP.
Because the Company's management uses financial information prepared in
conformity with accounting principles generally accepted in Canada in the normal
course of business, the management of Sun Life Assurance Company of Canada
(U.S.) has determined that the cost of complying with Statement No. 120,
"Accounting and Reporting by Mutual Insurance Enterprises and by Insurance
Enterprises for Certain Long Duration Participating Contracts", exceeds the
benefits that the Company, or the users of its financial statements, would
experience. Consequently, the Company has elected not to apply such standards in
the preparation of these financial statements.
73
<PAGE>
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
We have audited the accompanying statutory statements of admitted assets,
liabilities and capital stock and surplus of Sun Life Assurance Company of
Canada (U.S.) (the "Company") as of December 31, 1998 and 1997, and the related
statutory statements of operations, changes in capital stock and surplus, and
cash flow for each of the three years in the period ended December 31, 1998.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As described more fully in Notes 1 and 20 to the financial statements, the
Company prepared these financial statements using accounting practices
prescribed or permitted by the Insurance Department of the State of Delaware,
which is a comprehensive basis of accounting other than generally accepted
accounting principles. The effects on the financial statements of the
differences between the statutory basis of accounting and generally accepted
accounting principles, although not reasonably determinable, are presumed to be
material.
In our opinion, the statutory financial statements referred to above
present fairly, in all material respects, the admitted assets, liabilities, and
capital stock and surplus of Sun Life Assurance Company of Canada (U.S.) as of
December 31, 1998 and 1997, and the results of its operations and its cash flow
for each of the three years in the period ended December 31, 1998 on the basis
of accounting described in Notes 1 and 20.
However, because of the differences between the two bases of accounting
referred to in the second preceding paragraph, in our opinion, the statutory
financial statements referred to above do not present fairly, in conformity with
generally accepted accounting principles, the financial position of Sun Life
Assurance Company of Canada (U.S.) as of December 31, 1998 and 1997 or the
results of its operations or its cash flow for each of the three years in the
period ended December 31, 1998.
As management has stated in Note 20, because the Company's management uses
financial information prepared in accordance with accounting principles
generally accepted in Canada in the normal course of business, the management of
Sun Life Assurance Company of Canada (U.S.) has determined that the cost of
complying with Statement No. 120, ACCOUNTING AND REPORTING BY MUTUAL LIFE
INSURANCE ENTERPRISES AND BY INSURANCE ENTERPRISES FOR CERTAIN LONG-DURATION
PARTICIPATING CONTRACTS, would exceed the benefits that the Company, or the
users of its financial statements, would experience. Consequently, the Company
has elected not to apply such standards in the preparation of these financial
statements.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
February 5, 1999
74
<PAGE>
TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION
<TABLE>
<S> <C>
Calculation of Performance Data -- Average Annual Total Return.......................
Non-Standardized Investment Performance..............................................
Advertising and Sales Literature.....................................................
Calculations.........................................................................
Example of Variable Accumulation Unit Value Calculation............................
Example of Variable Annuity Unit Calculation.......................................
Example of Variable Annuity Payment Calculation....................................
Calculation of Annuity Unit Values.................................................
Distribution of the Contracts........................................................
Designation and Change of Beneficiary................................................
Custodian............................................................................
Financial Statements.................................................................
</TABLE>
75
<PAGE>
This Prospectus sets forth information about the Contracts and the
Variable Account that a prospective purchaser should know before investing.
Additional information about the Contracts and the Variable Account has been
filed with the Securities and Exchange Commission in a Statement of Additional
Information dated May 1, 1999 which is incorporated herein by reference. The
Statement of Additional Information is available upon request and without charge
from Sun Life Assurance Company of Canada (U.S.). To receive a copy, return this
request form to the address shown below or telephone (617) 348-9600 or (800)
752-7215.
- --------------------------------------------------------------------------------
To: Sun Life Assurance Company of Canada (U.S.)
Annuity Service Mailing Address:
c/o Retirement Products and Services
P.O. Box 1024
Boston, Massachusetts 02103
Please send me a Statement of Additional Information for
MFS Regatta Platinum Variable and Fixed Annuity
Sun Life of Canada (U.S.) Variable Account F.
Name
- --------------------------------------------------------------
Address
- --------------------------------------------------------------
-------------------------------------------------------------------------
City
- ------------------------------------ State
- -------------- Zip
- -------
Telephone
- ----------------------------------------------------------------
76
<PAGE>
APPENDIX A
GLOSSARY
The following terms as used in this Prospectus have the indicated
meanings:
ACCOUNT OR PARTICIPANT ACCOUNT: An account established for each
Participant to which Net Purchase Payments are credited.
ACCOUNT VALUE: The Variable Accumulation Value, if any, plus the Fixed
Accumulation Value, if any, of your Account for any Valuation Period.
ACCOUNT YEAR AND ACCOUNT ANNIVERSARY: Your first Account Year is the
period of (a) 12 full calendar months plus (b) the part of the calendar month in
which we issue your Contract (if not on the first day of the month), beginning
with the Contract Date. Your Account Anniversary is the first day immediately
after the end of an Account Year. Each Account Year after the first is the 12
calendar month period that begins on your Account Anniversary. If, for example,
the Contract Date is in March, the first Account Year will be determined from
the Contract Date but will end on the last day of March in the following year;
your Account Anniversary is April 1 and all Account Years after the first will
be measured from April 1.
ACCUMULATION PHASE: The period before the Annuity Commencement Date and
during the lifetime of the Participant during which you make Purchase Payments
under the Contract. This is called the "Accumulation Period" in the Contract.
ANNUITANT: The person or persons to whom the first annuity payment is
made. If the Annuitant dies prior to the Annuity Commencement Date, the new
Annuitant will be the Co-Annuitant, if any. If the Co-Annuitant dies or if no
Co-Annuitant is named, the Participant becomes the Annuitant upon the
Annuitant's death prior to the Annuity Commencement Date. If you have not named
a sole Annuitant on the 30th day before the Annuity Commencement Date and both
the Annuitant and Co-Annuitant are living, the Co-Annuitant will be the sole
Annuitant during the Income Phase.
*ANNUITY COMMENCEMENT DATE: The date on which the first annuity payment
under each Contract is to be made.
*ANNUITY OPTION: The method you choose for making annuity payments.
ANNUITY UNIT: A unit of measure used in the calculation of the amount of
the second and each subsequent variable annuity payment from the Variable
Account.
APPLICATION: The document signed by you or other evidence acceptable to us
that serves as your application for participation under a Group Contract or
purchase of an Individual Contract.
*BENEFICIARY: Prior to the Annuity Commencement Date, the person or entity
having the right to receive the death benefit and, for Non-Qualified Contracts,
who, in the event of the Participant's death, is the "designated beneficiary"
for purposes of Section 72(s) of the Internal Revenue Code. After the Annuity
Commencement Date, the person or entity having the right to receive any payments
due under the Annuity Option elected, if applicable, upon the death of the
Payee.
BUSINESS DAY: Any day the New York Stock Exchange is open for trading.
CERTIFICATE: The document for each Participant which evidences the
coverage of the Participant under a Group Contract.
COMPANY: Sun Life Assurance Company of Canada (U.S.).
CONTRACT DATE: The date on which we issue your Contract. This is called
the "Date of Coverage" in the Contract.
DEATH BENEFIT DATE: If you have elected a death benefit payment option
before your death that remains in effect, the date on which we receive Due Proof
of Death. If your Beneficiary elects the
* You specify these items on the Contract Specifications page or Certificate
Specifications page, and may change them, as we describe in this Prospectus.
77
<PAGE>
death benefit payment option, the later of (a) the date on which we receive the
Beneficiary's election and (b) the date on which we receive Due Proof of Death.
If we do not receive the Beneficiary's election within 60 days after we receive
Due Proof of Death, the Death Benefit Date will be the last day of the 60 day
period and we will pay the death benefit in cash.
DUE PROOF OF DEATH: An original certified copy of an official death
certificate, an original certified copy of a decree of a court of competent
jurisdiction as to the finding of death, or any other proof satisfactory to the
Company.
EXPIRATION DATE: The last day of a Guarantee Period.
FIXED ACCOUNT: The general account of the Company, consisting of all
assets of the Company other than those allocated to a separate account of the
Company.
FIXED ACCOUNT VALUE: The value of that portion of your Account allocated
to the Fixed Account.
FIXED ANNUITY: An annuity with payments which do not vary as to dollar
amount.
GROUP CONTRACT: A Contract issued by the Company on a group basis.
GUARANTEE AMOUNT: Each separate allocation of Account Value to a
particular Guarantee Period (including interest earned thereon).
GUARANTEE PERIOD: The period for which a Guaranteed Interest Rate is
credited.
GUARANTEED INTEREST RATE: The rate of interest we credit on a compound
annual basis during any Guarantee Period.
INCOME PHASE: The period on and after the Annuity Commencement Date and
during the lifetime of the Annuitant during which we make annuity payments under
the Contract.
INDIVIDUAL CONTRACT: A Contract issued by the Company on an individual
basis.
NET INVESTMENT FACTOR: An index applied to measure the investment
performance of a Sub-Account from one Valuation Period to the next. The Net
Investment Factor may be greater or less than or equal to one.
NET PURCHASE PAYMENT: The portion of a Purchase Payment which remains
after the deduction of any applicable premium tax or similar tax.
NON-QUALIFIED CONTRACT: A Contract used in connection with a retirement
plan that does not receive favorable federal income tax treatment under Sections
401, 403, 408, or 408A of the Internal Revenue Code. The Participant's interest
in the Contract must be owned by a natural person or agent for a natural person
for the Contract to receive income tax treatment as an annuity.
OWNER: The person, persons or entity entitled to the ownership rights
stated in a Group Contract and in whose name or names the Group Contract is
issued. The Owner may designate a trustee or custodian of a retirement plan
which meets the requirements of Section 401, Section 408(c), Section 408(k),
Section 408(p) or Section 408A of the Internal Revenue Code to serve as legal
owner of assets of a retirement plan, but the term "Owner," as used herein,
shall refer to the organization entering into the Group Contract.
PARTICIPANT: In the case of an Individual Contract, the owner of the
Contract. In the case of a Group Contract, the person named in the Contract who
is entitled to exercise all rights and privileges of ownership under the
Contract, except as reserved by the Owner.
PAYEE: A recipient of payments under a Contract. The term includes an
Annuitant or a Beneficiary who becomes entitled to benefits upon the death of
the Participant.
PURCHASE PAYMENT (PAYMENT): An amount paid to the Company as consideration
for the benefits provided by a Contract.
78
<PAGE>
QUALIFIED CONTRACT: A Contract used in connection with a retirement plan
which may receive favorable federal income tax treatment under Sections 401,
403, 408 or 408A of the Internal Revenue Code of 1986, as amended.
SERIES FUND: MFS/Sun Life Series Trust.
SEVEN-YEAR ANNIVERSARY: The seventh Account Anniversary and each
succeeding Account Anniversary occurring at any seven year interval thereafter;
for example, the 14th, 21st and 28th Account Anniversaries.
SUB-ACCOUNT: That portion of the Variable Account which invests in shares
of a specific series of the Series Fund.
VALUATION PERIOD: The period of time from one determination of Variable
Accumulation Unit or Annuity Unit values to the next subsequent determination of
these values. Value determinations are made as of the close of the New York
Stock Exchange on each day that the Exchange is open for trading.
VARIABLE ACCOUNT: Variable Account F of the Company, which is a separate
account of the Company consisting of assets set aside by the Company, the
investment performance of which is kept separate from that of the general assets
of the Company.
VARIABLE ACCUMULATION UNIT: A unit of measure used in the calculation of
Variable Account Value.
VARIABLE ACCOUNT VALUE: The value of that portion of your Account
allocated to the Variable Account.
VARIABLE ANNUITY: An annuity with payments which vary as to dollar amount
in relation to the investment performance of the Variable Account.
79
<PAGE>
APPENDIX B
CONDENSED FINANCIAL INFORMATION--ACCUMULATION UNIT VALUES
The following information should be read in conjunction with the Variable
Account's financial statements appearing in the Prospectus, all of which has
been audited by Deloitte & Touche LLP, independent certified public accountants.
<TABLE>
<CAPTION>
PERIOD ENDED
DECEMBER 31,
1998*
------------
BOND SERIES
<S> <C>
Unit Value:
Beginning of period........................... $10.0000
End of period................................. $10.4201
Units outstanding end of period................. 628,000
CAPITAL APPRECIATION SERIES
Unit Value:
Beginning of period........................... $10.0000
End of period................................. $11.3405
Units outstanding end of period................. 1,683,164
CAPITAL OPPORTUNITIES SERIES
Unit Value:
Beginning of period........................... $10.0000
End of period................................. $10.8048
Units outstanding end of period................. 556,955
EMERGING GROWTH SERIES
Unit Value:
Beginning of period $10.0000
End of period................................. $11.5819
Units outstanding end of period................. 1,651,404
EQUITY INCOME SERIES
Unit Value:
Beginning of period $10.0000
End of period................................. $10.5234
Units outstanding end of period................. 272,362
GLOBAL ASSET ALLOCATION SERIES
Unit Value:
Beginning of period........................... $10.0000
End of period................................. $ 9.7081
Units outstanding end of period................. 228,839
GLOBAL GOVERNMENTS SERIES
Unit Value:
Beginning of period........................... $10.0000
End of period................................. $11.2639
Units outstanding end of period................. 76,270
GLOBAL GROWTH SERIES
Unit Value:
Beginning of period........................... $10.0000
End of period................................. $10.2820
Units outstanding end of period................. 162,856
GLOBAL TOTAL RETURN SERIES
Unit Value:
Beginning of period........................... $10.0000
End of period................................. $10.4567
Units outstanding end of period................. 152,857
</TABLE>
80
<PAGE>
<TABLE>
<CAPTION>
PERIOD ENDED
DECEMBER 31,
1998*
------------
GOVERNMENT SECURITIES SERIES
<S> <C>
Unit Value:
Beginning of period........................... $10.0000
End of period................................. $10.4116
Units outstanding end of period................. 816,102
HIGH YIELD SERIES
Unit Value:
Beginning of period........................... $10.0000
End of period................................. $ 9.5030
Units outstanding end of period................. 1,000,705
INTERNATIONAL GROWTH SERIES
Unit Value:
Beginning of period........................... $10.0000
End of period................................. $ 9.3254
Units outstanding end of period................. 338,938
INTERNATIONAL GROWTH AND INCOME SERIES
Unit Value:
Beginning of period........................... $ 10.000
End of period................................. $10.3378
Units outstanding end of period................. 199,346
MANAGED SECTORS SERIES
Unit Value:
Beginning of period........................... $10.0000
End of period................................. $10.5861
Units outstanding end of period................. 211,044
MASSACHUSETTS INVESTORS TRUST SERIES
Unit Value:
Beginning of period........................... $10.0000
End of period................................. $10.7939
Units outstanding end of period................. 5,331,018
MASSACHUSETTS INVESTORS GROWTH STOCK SERIES
Unit Value:
Beginning of period $10.0000
End of period................................. $11.9094
Units outstanding end of period................. 2,428,134
MFS/FOREIGN & COLONIAL EMERGING MARKETS
EQUITY SERIES
Unit Value:
Beginning of period........................... $10.0000
End of period................................. $ 8.1616
Units outstanding end of period................. 72,586
MONEY MARKET SERIES
Unit Value:
Beginning of period........................... $10.0000
End of period................................. $10.1878
Units outstanding end of period................. 886,479
NEW DISCOVERY SERIES
Unit Value:
Beginning of period $10.0000
End of period................................. $10.4124
Units outstanding end of period................. 436,178
</TABLE>
81
<PAGE>
<TABLE>
<CAPTION>
PERIOD ENDED
DECEMBER 31,
1998*
------------
RESEARCH SERIES
<S> <C>
Unit Value:
Beginning of period........................... $10.0000
End of period................................. $11.0189
Units outstanding end of period................. 1,751,713
RESEARCH GROWTH AND INCOME SERIES
Unit Value:
Beginning of period........................... $10.0000
End of period................................. $10.3415
Units outstanding end of period................. 387,080
RESEARCH INTERNATIONAL SERIES
Unit Value:
Beginning of period $10.0000
End of period................................. $ 9.4845
Units outstanding end of period................. 181,131
STRATEGIC INCOME SERIES
Unit Value:
Beginning of period $10.0000
End of period................................. $ 9.8713
Units outstanding end of period................. 157,634
TOTAL RETURN SERIES
Unit Value:
Beginning of period........................... $10.0000
End of period................................. $10.2907
Units outstanding end of period................. 2,318,847
UTILITIES SERIES
Unit Value:
Beginning of period........................... $10.0000
End of period................................. $10.9233
Units outstanding end of period................. 819,649
</TABLE>
- ------------------------
* Unit value on date of commencement of operations of the respective
Sub-Account.
82
<PAGE>
APPENDIX C
WITHDRAWALS, WITHDRAWAL CHARGES AND THE MARKET VALUE ADJUSTMENT
PART 1: VARIABLE ACCOUNT (THE MARKET VALUE ADJUSTMENT DOES NOT APPLY TO THE
VARIABLE ACCOUNT)
WITHDRAWAL CHARGE CALCULATION:
FULL WITHDRAWAL:
Assume a Purchase Payment of $40,000 is made on the Contract Date, no
additional Purchase Payments are made and there are no partial withdrawals. The
table below presents four examples of the withdrawal charge resulting from a
full withdrawal of your Account, based on hypothetical Account Values.
<TABLE>
<CAPTION>
FREENEWWITHDRAWALWITHDRAWALACCOUNT
WITHDRAWALPAYMENTSCHARGECHARGEYEAR
AMOUNTWITHDRAWNPERCENTAGEAMOUNT
--------
HYPOTHETICAL
ACCOUNT
VALUE
--
------- ------- ------- ------
(a) 1 $ 41,000 $ 4,000 $ 37,000 6.00% $ 2,220
<S> <C> <C> <C>
(b) 3 $ 52,000 $ 12,000 $ 40,000 5.00% $ 2,000
(c) 7 $ 80,000 $ 28,000 $ 40,000 3.00% $ 1,200
(d) 9 $ 98,000 $ 68,000 0 0.00% 0
</TABLE>
(a) The free withdrawal amount in any Account Year is equal to (1) the Annual
Withdrawal Allowance for that year (i.e., 10% of all Purchase Payments made
in the last seven Account Years ("New Payments")); plus (2) any unused
Annual Withdrawal Allowances from previous years; plus (3) any Purchase
Payments made before the last seven Account Years ("Old Payments") not
previously withdrawn. In Account Year 1, the free withdrawal amount is
$4,000 (the Annual Withdrawal Allowance for that year) because there are no
unused Annual Withdrawal Allowances from previous years and no Old Payments.
The $41,000 full withdrawal is attributed first to the $4,000 free
withdrawal amount. The remaining $37,000 is withdrawn from the Purchase
Payment made in Account Year 1 and is subject to the withdrawal charge.
(b) In Account Year 3, the free withdrawal amount is $12,000 (the $4,000 Annual
Withdrawal Allowance for the current year plus the unused $4,000 Annual
Withdrawal Allowances for each of Account Years 1 and 2). The $52,000 full
withdrawal is attributed first to the free withdrawal amount and the
remaining $40,000 is withdrawn from the Purchase Payment made in Account
Year 1.
(c) In Account Year 7, the free withdrawal amount is $28,000 (the $4,000 Annual
Withdrawal Allowance for the current Account Year plus the unused Annual
Withdrawal Allowance of $4,000 for each of Account Years 1 through 6). The
$80,000 full withdrawal is attributed first to the free withdrawal amount.
The next $40,000 is withdrawn from the Purchase Payment made in Account Year
1 and is subject to the withdrawal charge. The remaining $12,000 exceeds the
total of the free withdrawal amount plus all New Payments not previously
withdrawn, so it is not subject to the withdrawal charge.
(d) In Account Year 9, the free withdrawal amount is $68,000, calculated as
follows. There are no Annual Withdrawal Allowances for Account Years 8 or 9
because there are no New Payments in those years. The $40,000 Purchase
Payment made in Account Year 1 is now an Old Payment that constitutes a
portion of the free withdrawal amount. In addition, the unused Annual
Withdrawal Allowances of $4,000 for each of Account Years 1 through 7 are
carried forward and available for use in Account Year 9. The $98,000 full
withdrawal is attributed first to the free withdrawal amount. Because the
remaining $30,000 is not withdrawn from New Payments, this part of the
withdrawal also will not be subject to the withdrawal charge.
83
<PAGE>
PARTIAL WITHDRAWAL:
Assume a single Purchase Payment of $40,000 is made on the Contract Date,
no additional Purchase Payments are made, no partial withdrawals have been taken
prior to the fifth Account Year, and there are a series of three partial
withdrawals made during the fifth Account Year of $9,000, $12,000, and $15,000.
<TABLE>
<CAPTION>
HYPOTHETICAL PARTIAL FREE NEW WITHDRAWAL WITHDRAWAL
ACCOUNT WITHDRAWAL WITHDRAWAL PAYMENTS CHARGE CHARGE
VALUE AMOUNT AMOUNT WITHDRAWN PERCENTAGE AMOUNT
------------ ----------- ----------- ----------- --------------- -------------
<S> <C> <C> <C> <C> <C> <C>
(a) $ 64,000 $ 9,000 $ 20,000 $ 0 4.00% $ 0
(b) $ 56,000 $ 12,000 $ 11,000 $ 1,000 4.00% $ 40
(c) $ 40,000 $ 15,000 $ 0 $ 15,000 4.00% $ 600
</TABLE>
(a) In the fifth Account Year, the free withdrawal amount is equal to $20,000
(the $4,000 Annual Withdrawal Allowance for the current year, plus the
unused $4,000 for each of the Account Years 1 through 4). The partial
withdrawal amount ($9,000) is less than the free withdrawal amount so no New
Payments are withdrawn and no withdrawal charge applies.
(b) Since a partial withdrawal of $9,000 was taken, the remaining free
withdrawal amount is equal to $11,000. The $12,000 partial withdrawal will
first be applied against the $11,000 free withdrawal amount. The remaining
$1,000 will be withdrawn from the $40,000 New Payment, incurring a
withdrawal charge of $40.
(c) The free withdrawal amount is zero since the previous partial withdrawals
have already used the free withdrawal amount. The entire partial withdrawal
amount will result in New Payments being withdrawn and will incur a
withdrawal charge.
PART 2 -- FIXED ACCOUNT -- EXAMPLES OF THE MARKET VALUE ADJUSTMENT ("MVA")
The MVA Factor is:
<TABLE>
<C> <C>
N/12
1 + I
( -------- ) -1
1 + J + b
</TABLE>
These examples assume the following:
1) the Guarantee Amount was allocated to a five year Guarantee Period
with a Guaranteed Interest Rate of 6% or .06.
2) the date of surrender is two years from the Expiration Date (N =
24).
3) the value of the Guarantee Amount on the date of surrender is
$11,910.16.
4) the interest earned in the current Account Year is $674.16.
5) no transfers or partial withdrawals affecting this Guarantee Amount
have been made.
6) withdrawal charges, if any, are calculated in the same manner as
shown in the examples in Part 1.
84
<PAGE>
EXAMPLE OF A NEGATIVE MVA:
Assume that on the date of surrender, the current rate (J) is 8% or .08
and the b factor is zero.
<TABLE>
<C> <S> <C> <C>
N/12
1 + I
The MVA factor = ( -------- ) -1
1 + J + b
</TABLE>
<TABLE>
<C> <S> <C> <C>
24/12
1 + .06
= ( ------ ) -1
1 + .08
= (.981)(2) -1
= .963 -1
= - .037
</TABLE>
The value of the Guarantee Amount less interest credited to the Guarantee
Amount in the current Account Year is multiplied by the MVA factor to determine
the MVA
($11,910.16 - $674.16) X (-.037) = -$415.73
-$415.73 represents the MVA that will be deducted from the value of the
Guarantee Amount before the deduction of any withdrawal charge.
For a partial withdrawal of $2,000 from this Guarantee Amount, the MVA
would be ($2,000.00 - $674.16) X (-.037) = -$49.06. -$49.06 represents the MVA
that will be deducted from the partial withdrawal amount before the deduction of
any withdrawal charge.
EXAMPLE OF A POSITIVE MVA:
Assume that on the date of surrender, the current rate (J) is 5% or .05
and the b factor is zero.
<TABLE>
<C> <S> <C> <C>
N/12
1 + I
The MVA factor = ( -------- ) -1
1 + J + b
</TABLE>
<TABLE>
<C> <S> <C> <C>
24/12
1 + .06
= ( ------ ) -1
1 + .05
= (1.010)(2) -1
= 1.019 -1
= - .019
</TABLE>
The value of the Guarantee Amount less interested credit to the Guarantee
Amount in the current Account Year is multiplied by the MVA factor to determine
the MVA
($11,910.16 - $674.16) X .019 = $213.48
$213.48 represents the MVA that would be added to the value of the
Guarantee Amount before the deduction of any withdrawal charge.
For a partial withdrawal of $2,000 from this Guarantee Amount, the MVA
would be ($2,000.00 - $674.16) X .019 = $25.19.
$25.19 represents the MVA that would be added to the value of the partial
withdrawal amount before the deduction of any withdrawal charge.
85
<PAGE>
<TABLE>
<S> <C>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
ANNUITY SERVICE MAILING ADDRESS:
C/O RETIREMENT PRODUCTS AND SERVICES
P.O. BOX 1024
BOSTON, MASSACHUSETTS 02103
TELEPHONE:
Toll Free (800) 752-7215
In Massachusetts (617) 348-9600
GENERAL DISTRIBUTOR
Clarendon Insurance Agency, Inc.
One Sun Life Executive Park
Wellesley Hills, Massachusetts 02481
AUDITORS
Deloitte Touche LLP
125 Summer Street
Boston, Massachusetts 02110
PLAT-1 5/99
</TABLE>
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
MAY 1, 1999
PROFILE
MFS REGATTA GOLD
VARIABLE AND FIXED
ANNUITY
THIS PROFILE IS A SUMMARY OF SOME OF THE MORE IMPORTANT POINTS THAT YOU
SHOULD KNOW AND CONSIDER BEFORE PURCHASING THE CONTRACT. THE CONTRACT IS MORE
FULLY DESCRIBED IN THE FULL PROSPECTUS WHICH ACCOMPANIES THIS PROFILE. PLEASE
READ THE PROSPECTUS CAREFULLY.
1. THE MFS REGATTA GOLD ANNUITY
The MFS Regatta Gold Annuity is a flexible payment deferred annuity
contract ("Contract") designed for use in connection with retirement and
deferred compensation plans, some of which may qualify for favorable federal
income tax treatment. The Contract is intended to help you achieve your
retirement savings or other long-term investment goals.
The Contract has two phases: an Accumulation Phase and an Income Phase.
During the Accumulation Phase you make payments into the Contract; any
investment earnings under your Contract accumulate on a tax-deferred basis and
are taxed as income only when withdrawn. During the Income Phase, we make
annuity payments in amounts determined in part by the amount of money you have
accumulated under your Contract during the Accumulation Phase. You choose when
the Income Phase begins.
You may choose among 25 variable investment options and a range of fixed
interest options. For a variable investment return you choose one or more
Sub-Accounts in our Variable Account, each of which invests in shares of a
corresponding series of the MFS/Sun Life Series Trust (collectively, the
"Series") listed in Section 4. The value of any portion of your Contract
allocated to the Sub-Accounts will fluctuate up or down depending on the
performance of the Series you select, and you may experience losses. For a fixed
interest rate, you may choose one or more Guarantee Periods offered in our Fixed
Account, each of which earns its own Guaranteed Interest Rate if you keep your
money in that Guarantee Period for the specified length of time.
The Contract is designed to meet your need for investment flexibility. At
any time you may have amounts allocated among up to 18 of the available variable
and fixed options. Until we begin making annuity payments under your Contract,
you can, subject to certain limitations, transfer money between options up to 12
times each year without a transfer charge or adverse tax consequences.
2. ANNUITY PAYMENTS (THE INCOME PHASE)
Just as you can elect to have your Contract value accumulate on either a
variable or fixed basis, or a combination of both, you can elect to receive
annuity payments on either a variable or fixed basis or both. If you choose to
have any part of your annuity payments come from the Sub-Accounts, the dollar
amount of your annuity payments may fluctuate.
The Contract offers a variety of annuity options. You can select from
among the following methods of receiving either variable or fixed annuity
payments under your Contract: (1) monthly payments continuing for your lifetime
(assuming you are the annuitant); (2) monthly payments for your lifetime, but
with payments continuing to your chosen beneficiary for 5, 10, 15 or 20 years if
you die before the end of the period you have selected; (3) monthly payments for
your lifetime and the life of another person (usually your spouse) you have
chosen; and (4) monthly payments for a specified number of years (between 5 and
30), with a cash-out option for variable payments. You can also select a fixed
payment option where we will hold the amount applied to provide fixed annuity
payments, with interest accrued at the rate we determine from time to time,
which will be at least 3% per year. We may also agree to other annuity options
in our discretion.
Once the Income Phase begins, you cannot change your choice of annuity
payment method.
3. PURCHASING A CONTRACT
You may purchase a Contract for $5,000 or more, under most circumstances.
You may increase the value of your investment by adding $1,000 or more at any
time during the Accumulation Phase. We will not accept a Purchase Payment if
your Account Value is over $1 million, or if the Purchase
<PAGE>
Payment would cause your Account Value to exceed $1 million, unless we have
approved the Payment in advance.
4. ALLOCATION OPTIONS
You can allocate your money among Sub-Accounts investing in the following
Series of the MFS/ Sun Life Series Trust:
<TABLE>
<S> <C>
Bond Series Managed Sectors Series
Capital Appreciation Series Massachusetts Investors Growth Stock Series
Capital Opportunities Series Massachusetts Investors Trust Series
Emerging Growth Series MFS/Foreign & Colonial Emerging Markets Equity Series
Equity Income Series Money Market Series
Global Asset Allocation Series New Discovery Series
Global Governments Series Research Series
Global Growth Series Research Growth and Income Series
Global Total Return Series Research International Series
Government Securities Series Strategic Income Series
High Yield Series Total Return Series
International Growth Series Utilities Series
International Growth and Income
Series
</TABLE>
Market conditions will determine the value of an investment in any Series.
Each series is described in the Prospectus of the MFS/Sun Life Series Trust.
In addition to these variable options, you may also allocate your money to
one or more of the Guarantee Periods we make available. For each Guarantee
Period, we offer a Guaranteed Interest Rate for the specified length of time.
5. EXPENSES
The charges under the Contracts are as follows:
During the first 5 years of a Contract, we impose an annual Account Fee
equal to the lesser of $30 or 2% of the value of your Contract. After the fifth
year, we may change this fee annually, but it will never exceed the lesser of
$50 or 2% of the value of your Contract. During the Income Phase, the annual
Account Fee is $30. We also deduct insurance charges (which include an
administrative expense charge) equal to 1.40% per year of the average daily
value of the Contract allocated among the Sub-Accounts.
There are no sales charges when you purchase your MFS Regatta Gold
Annuity. However, if you withdraw money from your Contract, we will, with
certain exceptions, impose a withdrawal charge. Your Contract allows a "free
withdrawal amount," which you may withdraw before you incur the withdrawal
charge. The rest of your withdrawal is subject to a withdrawal charge equal to a
percentage of each purchase payment you withdraw and is determined in accordance
with the table below. The percentage varies according to the number of Contract
years the purchase payment has been held in your account, including the year in
which you made the payment, but not the year in which you withdraw it.
<TABLE>
<CAPTION>
NUMBER OF
YEARS IN ACCOUNT WITHDRAWAL CHARGE
- ----------------- -----------------------
<S> <C>
0-1 6%
2-3 5%
4-5 4%
6 3%
7 or more 0%
</TABLE>
If you withdraw, transfer, or annuitize money allocated to a Guarantee
Period more than 30 days before the expiration date of the Guarantee Period, the
amount will be subject to a Market Value Adjustment. This adjustment reflects
the relationship between our current Guaranteed Interest Rates and the
Guaranteed Interest Rate applicable to the amount being withdrawn. Generally, if
your Guaranteed Interest Rate is lower than the relevant current rate, then the
adjustment will decrease your
2
<PAGE>
Contract value. Conversely, if your Guaranteed Interest Rate is higher than the
relevant current rate, the adjustment will increase your Contract value. The
Market Value Adjustment will not apply to the withdrawal of interest credited
during the current year, or to transfers as part of our dollar cost averaging
program.
In addition to the charges we impose under the Contracts, there are
charges (which include management fees and operating expenses) imposed by each
Series, which range from 0.56% to 1.55% of the average net assets of the Series,
depending upon which Series you have selected. The investment adviser has agreed
to waive or reimburse a portion of expenses for some of the Series; without this
agreement, Series expenses could be higher. Some of these arrangements may be
terminated after one year, or earlier if the Series Fund's Board of Trustees
agrees.
The following chart is designed to help you understand the expenses you
will incur under your Contract, if you invest in one or more of the
Sub-Accounts. The column "Total Annual Expenses" shows the sum of the "Total
Annual Insurance Charges," as defined just above the chart, and the total
expenses for each Series. The next two columns show two examples of the
expenses, in dollars, you would pay under a Contract. The examples assume that
you invested $1,000 in a Contract which earns 5% annually and that you withdraw
your money (1) at the end of one year or (2) at the end of 10 years. For the
first year, the Total Annual Expenses are deducted, as well as withdrawal
charges. For year 10, the example shows the aggregate of all of the annual
expenses deducted for the 10 years, but there is no withdrawal charge.
"Total Annual Insurance Charges" include the insurance charges of 1.40%,
plus an additional 0.10%, which is used to represent the $30 annual Account Fee
based on an assumed Contract value of $35,000. The actual impact of the Account
Fee may be greater or less than 0.10%, depending upon the value of your
Contract.
<TABLE>
<CAPTION>
EXAMPLES:
TOTAL ANNUAL TOTAL ANNUAL TOTAL TOTAL EXPENSES
INSURANCE SERIES ANNUAL AT END
SUB-ACCOUNT CHARGES EXPENSES EXPENSES 1 YEAR 10 YEARS
- ------------------------------------------------- ---------------- --------------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Bond Series 1.50% 1.03% 2.53% $ 81 $ 287
(1.40% + 0.10%)
Capital Appreciation Series 1.50% 0.77% 2.27% $ 79 $ 261
(1.40% + 0.10%)
Capital Opportunities Series 1.50% 0.86% 2.36% $ 79 $ 270
(1.40% + 0.10%)
Emerging Growth Series 1.50% 0.78% 2.28% $ 79 $ 262
(1.40% + 0.10%)
Equity Income Series 1.50% 1.03% 2.53% $ 81 $ 287
(1.40% + 0.10%)
Global Asset Allocation Series 1.50% 0.90% 2.40% $ 80 $ 274
(1.40% + 0.10%)
Global Governments Series 1.50% 0.88% 2.38% $ 80 $ 272
(1.40% + 0.10%)
Global Growth Series 1.50% 1.01% 2.51% $ 81 $ 285
(1.40% + 0.10%)
Global Total Return Series 1.50% 0.93% 2.43% $ 80 $ 277
(1.40% + 0.10%)
Government Securities Series 1.50% 0.62% 2.12% $ 77 $ 245
(1.40% + 0.10%)
High Yield Series 1.50% 0.82% 2.32% $ 79 $ 266
(1.40% + 0.10%)
International Growth Series 1.50% 1.32% 2.82% $ 84 $ 315
(1.40% + 0.10%)
International Growth and Income Series 1.50% 1.16% 2.66% $ 82 $ 299
(1.40% + 0.10%)
Managed Sectors Series 1.50% 0.80% 2.30% $ 79 $ 264
(1.40% + 0.10%)
Massachusetts Investors Growth Stock Series 1.50% 0.97% 2.47% $ 81 $ 281
(1.40% + 0.10%)
Massachusetts Investors Trust Series 1.50% 0.59% 2.09% $ 77 $ 242
(1.40% + 0.10%)
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
EXAMPLES:
TOTAL ANNUAL TOTAL ANNUAL TOTAL TOTAL EXPENSES
INSURANCE SERIES ANNUAL AT END
SUB-ACCOUNT CHARGES EXPENSES EXPENSES 1 YEAR 10 YEARS
- ------------------------------------------------- ---------------- --------------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
MFS/Foreign & Colonial Emerging Markets Equity 1.50% 1.50% 3.00% $ 86 $ 332
Series (1.40% + 0.10%)
Money Market Series 1.50% 0.56% 2.06% $ 77 $ 239
(1.40% + 0.10%)
New Discovery Series 1.50% 1.28% 2.78% $ 83 $ 311
(1.40% + 0.10%)
Research Series 1.50% 0.76% 2.26% $ 79 $ 260
(1.40% + 0.10%)
Research Growth and Income Series 1.50% 0.95% 2.45% $ 80 $ 279
(1.40% + 0.10%)
Research International Series 1.50% 1.55% 2.05% $ 86 $ 336
(1.40% + 0.10%)
Strategic Income Series 1.50% 1.29% 2.79% $ 84 $ 312
(1.40% + 0.10%)
Total Return Series 1.50% 0.70% 2.20% $ 78 $ 253
(1.40% + 0.10%)
Utilities Series 1.50% 0.86% 2.36% $ 79 $ 270
(1.40% + 0.10%)
</TABLE>
For more detailed information about Contract fees and expenses, please
refer to the fee table and discussion of Contract charges contained in the full
Prospectus which accompanies this Profile.
6. TAXES
Your earnings are not taxed until you take them out of your Contract. If
you take money out, earnings come out first and are taxed as income. If your
Contract is funded with pre-tax or tax deductible dollars (such as with a
pension or IRA contribution) -- we call this a Qualified Contract -- your entire
withdrawal will be taxable. If you are younger than 59 1/2 when you take money
out, you may be charged a 10% federal penalty tax on the earnings. Annuity
payments during the Income Phase are considered in part a return of your
original investment. That portion of each payment is not taxable as income
except under a Qualified Contract, in which case the entire payment will be
taxable. In all cases, you should consult with your tax adviser for specific tax
information.
7. ACCESS TO YOUR MONEY
You can withdraw money from your Contract at any time during the
Accumulation Phase. You may withdraw a portion of the value of your Contract in
each year without the imposition of the withdrawal charge -- 10% of all payments
you have made in the last 7 years, plus any payment we have held for at least 7
years. All other purchase payments you withdraw will be subject to a withdrawal
charge ranging from 6% to 0%. (If you purchased your Contract before November
1994 or your state requires, your withdrawal charge will be calculated
differently, using the alternative method we describe in the Prospectus. You
should check your Contract to see which method applies to you.) You may also be
required to pay income tax and possible tax penalties on any money you withdraw.
We do not assess a withdrawal charge upon annuitization or transfers. In
certain circumstances, we will waive the withdrawal charges for a full
withdrawal when you are confined to an eligible nursing home. In addition, there
may be other circumstances under which we may waive the withdrawal charge.
In addition to the withdrawal charge, amounts you withdraw, transfer or
annuitize from the Fixed Account before your Guarantee Period has ended may be
subject to a Market Value Adjustment.
8. PERFORMANCE
If you invest in one or more Sub-Accounts, the value of your Contract will
increase or decrease depending upon the investment performance of the Series you
choose.
The following chart shows total returns for investment in the Sub-Accounts
where the corresponding Series has at least one full calendar year of
operations. The returns reflect all charges and deductions of the Series and
Sub-Accounts and deduction of the Annual Account Fee. They do not
4
<PAGE>
reflect deduction of any withdrawal charges or premium taxes. These charges, if
included, would reduce the performance numbers shown. Past performance is not a
guarantee of future results.
<TABLE>
<CAPTION>
CALENDAR YEAR
---------------------------------------------------------------------------------
SUB-ACCOUNT 1998 1997 1996 1995 1994 1993 1992
---------------------------------------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Bond Series -- -- -- -- -- -- --
Capital Appreciation Series 26.83% 21.33% 19.70% 32.51% (5.03)% 16.26% 11.53%
Capital Opportunities Series 21.10% 25.73% -- -- -- -- --
Emerging Growth Series 31.91% 20.16% 15.38% -- -- -- --
Equity Income Series -- -- -- -- -- -- --
Global Asset Allocation Series 4.97% 9.24% 14.28% 19.85% -- -- --
Global Governments Series 13.77% (2.24)% 3.11% 14.00% (5.91)% 17.16% (1.01)%
Global Growth Series 12.87% 13.63% 11.42% 14.29% 1.40% -- --
Global Total Return Series 16.61% 11.98% 12.58% 16.19% -- -- --
Government Securities Series 7.13% 7.15% 0.11% 15.92% (3.61)% 7.07% 5.14%
High Yield Series (0.88)% 11.55% 10.46% 15.32% (3.68)% 16.01% 13.34%
International Growth Series 0.41% 3.09% -- -- -- -- --
International Growth and Income Series 19.84% 4.95% 3.33% -- -- -- --
Managed Sectors Series 10.62% 23.80% 15.86% 30.34% (3.38)% 2.52% 4.91%
Massachusetts Investors Growth Stock
Series -- -- -- -- -- -- --
Massachusetts Investors Trust Series 22.03% 30.04% 23.57% 35.44% (2.57)% 6.82% 4.05%
MFS/Foreign & Colonial Emerging Markets
Equity Series (31.02)% 8.78% -- -- -- -- --
Money Market Series 3.48% 3.52% 3.37% 3.90% 2.17% 1.11% 1.81%
New Discovery Series -- -- -- -- -- -- --
Research Series 21.82% 19.07% 22.00% 35.44% -- -- --
Research Growth and Income Series 20.38% -- -- -- -- -- --
Research International Series -- -- -- -- -- -- --
Strategic Income Series -- -- -- -- -- -- --
Total Return Series 10.10% 20.18% 12.38% 24.93% (3.71)% 11.72% 6.77%
Utilities Series 15.86% 30.80% 18.57% 30.46% (6.36)% -- --
<CAPTION>
SUB-ACCOUNT 1991 1990 1989
---------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Bond Series -- -- --
Capital Appreciation Series 38.89% (11.02)% 45.06%
Capital Opportunities Series -- -- --
Emerging Growth Series -- -- --
Equity Income Series -- -- --
Global Asset Allocation Series -- -- --
Global Governments Series 13.10% 11.67% 8.31%
Global Growth Series -- -- --
Global Total Return Series -- -- --
Government Securities Series 14.17% 7.27% 11.19%
High Yield Series 45.49% (15.65)% (2.41)%
International Growth Series -- -- --
International Growth and Income Series -- -- --
Managed Sectors Series 59.67% (11.80)% 43.27%
Massachusetts Investors Growth Stock
Series -- -- --
Massachusetts Investors Trust Series 34.87% (4.86)% 33.69%
MFS/Foreign & Colonial Emerging Markets
Equity Series -- -- --
Money Market Series 4.23% 6.26% 7.31%
New Discovery Series -- -- --
Research Series -- -- --
Research Growth and Income Series -- -- --
Research International Series -- -- --
Strategic Income Series -- -- --
Total Return Series 19.87% 1.15% 15.80%
Utilities Series -- -- --
</TABLE>
9. DEATH BENEFIT
If the annuitant dies before the Contract reaches the Income Phase, the
beneficiary will receive a death benefit. To calculate the death benefit, we use
a "Death Benefit Date," which is the earliest date we have both due proof of
death and a written request specifying the manner of payment.
If you were 85 or younger when we issued your Contract, the death benefit
is the greatest of:
(1) the value of the Contract on the Death Benefit Date;
(2) the amount we would pay in the event of a full surrender of the
Contract on the Death Benefit Date;
(3) the value of the Contract on the most recent 7 year anniversary of the
Contract, plus any purchase payments made and adjusted for any partial
withdrawals and charges made after that anniversary;
(4)your total purchase payments minus the sum of partial withdrawals;
interest will accrue daily on each purchase payment and each partial
withdrawal at a rate equivalent to 5% per year until the first day of
the month following the annuitant's 80th birthday, or until the
purchase payment or partial withdrawal has doubled in amount, whichever
is earlier.
If the annuitant was 86 or older when we issued your Contract, the death
benefit is equal to the amount set forth in (2) above, in this Section 9.
10. OTHER INFORMATION
FREE LOOK. Depending upon applicable state law, if you cancel your
Contract within 10 days after receiving it we will send you the value of your
Contract as of the day we received your cancellation request (this may be more
or less than the original purchase payment) and we will not deduct a
5
<PAGE>
withdrawal charge. However, if applicable state or federal law requires, we will
refund the full amount of any purchase payment(s) we receive and the "free look"
period may be greater than 10 days.
NO PROBATE. In most cases, when you die, the beneficiary will receive the
death benefit without going through probate. However, avoiding probate does not
mean that the beneficiary will not have tax liability as a result of receiving
the death benefit.
WHO SHOULD PURCHASE A CONTRACT? The Contract is designed for those seeking
long-term tax deferred accumulation of assets and annuity features, generally
for retirement or other long-term purposes. The tax-deferred feature is most
attractive to purchasers in high federal and state income tax brackets. You
should note that qualified retirement investments automatically provide tax
deferral regardless of whether the underlying contract is an annuity. You should
not buy a Contract if you are looking for a short-term investment or if you
cannot risk a decrease in the value of your investment.
CONFIRMATIONS AND QUARTERLY STATEMENTS. You will receive a confirmation of
each transaction within your Contract. On a quarterly basis, you will receive a
complete statement of your transactions over the past quarter and a summary of
your account values during that period.
ADDITIONAL FEATURES. The MFS Regatta Gold Annuity offers the following
additional convenient features, which you may choose at no extra charge.
Dollar Cost Averaging -- This program lets you invest gradually in up to
12 Sub-Accounts.
Asset Allocation -- One or more asset allocation programs may be available
in connection with the Contract.
Systematic Withdrawal and Interest Out Program -- These programs allow you
to receive quarterly, semi-annual or annual payments during the Accumulation
Phase.
Portfolio Rebalancing Program -- Under this program, we automatically
reallocate your investments in the Sub-Accounts to maintain the proportions you
select. You can elect rebalancing on a quarterly, semi-annual or annual basis.
Secured Future Program -- This program guarantees the return of your
Purchase Payment, and also allows you to allocate a portion of your investment
to one or more variable investment options.
11. INQUIRIES
If you would like more information about buying a Contract, please contact
your broker or registered representative. If you have any other questions,
please contact us at:
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
ANNUITY SERVICE MAILING ADDRESS
C/O RETIREMENT PRODUCTS AND SERVICES
P.O. BOX 1024
BOSTON, MASSACHUSETTS 02103
TEL: TOLL FREE (800) 752-7215
IN MASSACHUSETTS (617) 348-9600
6
<PAGE>
PROSPECTUS
MAY 1, 1999
MFS REGATTA GOLD
Sun Life Assurance Company of Canada (U.S.) and Sun Life of Canada (U.S.)
Variable Account F offer the flexible payment deferred annuity contracts and
certificates described in this Prospectus to groups and individuals.
You may choose among 25 variable investment options and a range of fixed
options. The variable options are Sub-Accounts in the Variable Account. Each
Sub-Account invests in one of the following series of the MFS/Sun Life Series
Trust (the "Series Fund"), a mutual fund advised by our affiliate, Massachusetts
Financial Services Company:
<TABLE>
<S> <C>
Bond Series Managed Sectors Series
Capital Appreciation Series Massachusetts Investors Growth Stock Series
Capital Opportunities Series Massachusetts Investors Trust Series
Emerging Growth Series MFS/Foreign & Colonial Emerging Markets Equity Series
Equity Income Series Money Market Series
Global Asset Allocation Series New Discovery Series
Global Government Series Research Series
Global Growth Series Research Growth and Income Series
Global Total Return Series Research International Series
Government Securities Series Strategic Income Series
High Yield Series Total Return Series
International Growth Series Utilities Series
International Growth and Income
Series
</TABLE>
The fixed account options are available for specified time periods, called
Guarantee Periods, and pay interest at a guaranteed rate for each period.
THIS PROSPECTUS MUST BE ACCOMPANIED BY A CURRENT PROSPECTUS FOR THE SERIES
FUND. PLEASE READ THIS PROSPECTUS AND THE SERIES FUND PROSPECTUS CAREFULLY
BEFORE INVESTING AND KEEP THEM FOR FUTURE REFERENCE. THEY CONTAIN IMPORTANT
INFORMATION ABOUT THE MFS REGATTA GOLD ANNUITY AND THE SERIES FUND.
We have filed a Statement of Additional Information dated May 1, 1999 (the
"SAI") with the Securities and Exchange Commission (the "SEC"), which is
incorporated by reference in this Prospectus. The table of contents for the SAI
is on page 77 of this Prospectus. You may obtain a copy without charge by
writing to our Annuity Service Mailing Address or by telephoning (800) 752-7215
or (617) 348-9600. In addition, the SEC maintains a website (http://www.sec.gov)
that contains the SAI, material incorporated by reference, and other information
regarding companies that file with the SEC.
THE CONTRACTS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY,
ANY BANK, AND ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY.
THE SEC HAS NOT APPROVED OR DISAPPROVED THESE SECURITIES OR PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
ANY REFERENCE IN THIS PROSPECTUS TO RECEIPT BY US MEANS RECEIPT AT THE FOLLOWING
ADDRESS:
ANNUITY SERVICE MAILING ADDRESS, C/O SUN LIFE ASSURANCE COMPANY OF CANADA
(U.S.)
RETIREMENT PRODUCTS AND SERVICES, P.O. BOX 1024, BOSTON, MASSACHUSETTS
02103
1
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Special Terms 4
Expense Summary 4
Summary of Contract Expenses 4
Series Fund Annual Expenses 5
Examples 6
Condensed Financial Information 7
The MFS Regatta Gold Annuity 7
Communicating to Us About Your Contract 7
Sun Life Assurance Company of Canada (U.S.) 8
The Variable Account 8
Variable Account Options: The MFS/Sun Life Series Trust 8
The Fixed Account 10
The Fixed Account Options: The Guarantee Periods 11
The Accumulation Phase 11
Issuing Your Contract 11
Amount and Frequency of Purchase Payments 12
Allocation of Net Purchase Payments 12
Your Account 12
Your Account Value 12
Variable Account Value 12
Fixed Account Value 13
Transfer Privilege 14
Waivers; Reduced Charges; Credits; Bonus Guaranteed Interest Rates 15
Optional Programs 15
Withdrawals, Withdrawal Charge and Market Value Adjustment 16
Cash Withdrawals 16
Withdrawal Charge 18
Market Value Adjustment 20
Contract Charges 21
Account Fee 21
Administrative Expense Charge 22
Mortality and Expense Risk Charge 22
Premium Taxes 22
Series Fund Expenses 22
Modification in the Case of Group Contracts 22
Death Benefit 22
Amount of Death Benefit 23
Method of Paying Death Benefit 23
Selection and Change of Beneficiary 24
Payment of Death Benefit 24
Due Proof of Death 24
The Income Phase -- Annuity Provisions 24
Selection of the Annuitant or Co-Annuitant 24
Selection of the Annuity Commencement Date 25
Annuity Options 25
Selection of Annuity Option 26
Amount of Annuity Payments 26
Exchange of Variable Annuity Units 27
Account Fee 28
Annuity Payment Rates 28
Annuity Options as Method of Payment for Death Benefit 28
</TABLE>
2
<PAGE>
<TABLE>
<S> <C>
Other Contract Provisions 28
Exercise of Contract Rights 28
Change of Ownership 28
Death of Participant 29
Voting of Series Fund Shares 29
Periodic Reports 30
Substitution of Securities 30
Change in Operation of Variable Account 31
Splitting Units 31
Modification 31
Discontinuance of New Participants 31
Reservation of Rights 31
Right to Return 32
Federal Tax Status 32
Introduction 32
Deductibility of Purchase Payments 32
Pre-Distribution Taxation of Contracts 32
Distributions and Withdrawals from Non-Qualified Contracts 33
Distribution and Withdrawals from Qualified Contracts 33
Withholding 33
Purchase of Immediate Annuity Contract and Deferred Annuity Contract 34
Investment Diversification and Control 34
Tax Treatment of the Company and the Variable Account 34
Qualified Retirement Plans 34
Pension and Profit-Sharing Plans 35
Tax-Sheltered Annuities 35
Individual Retirement Accounts 35
Roth IRAs 35
Administration of the Contracts 36
Distribution of the Contracts 36
Performance Information 36
Available Information 37
Incorporation of Certain Documents by Reference 38
Additional Information About the Company 38
Business of the Company 38
Selected Financial Data 39
Management's Discussion and Analysis of Financial Condition and Results of Operations 39
Demutualization 47
Year 2000 Compliance 47
Sale of Subsidiary 48
Quantitative and Qualitative Disclosure About Market Risk 48
Reinsurance 50
Reserves 50
Investments 50
Competition 50
Employees 51
Properties 51
State Regulation 51
Legal Proceedings 52
Accountants 52
Financial Statements 52
Table of Contents of Statement of Additional Information 77
Appendix A -- Glossary 79
Appendix B -- Condensed Financial Information-- Accumulation Unit Values 82
Appendix C -- Withdrawals, Withdrawal Charges and the Market Value Adjustment 84
</TABLE>
3
<PAGE>
SPECIAL TERMS
Your Contract is a legal document that uses a number of specially defined
terms. We explain most of the terms that we use in this Prospectus in the
context where they arise, and some are self-explanatory. In addition, for
convenient reference, we have compiled a list of these terms in the Glossary
included at the back of this Prospectus as Appendix A. If, while you are reading
this Prospectus, you come across a term that you do not understand, please refer
to the Glossary for an explanation.
EXPENSE SUMMARY
The purpose of the following table is to help you understand the costs and
expenses that you will bear directly and indirectly under a Contract WHEN YOU
ALLOCATE MONEY TO THE VARIABLE ACCOUNT. The table reflects expenses of the
Variable Account as well as of each Series of the Series Fund. The table should
be considered together with the narrative provided under the heading "Contract
Fees" in this Prospectus, and with the Series Fund's prospectus. In addition to
the expenses listed below, we may deduct premium taxes.
SUMMARY OF CONTRACT EXPENSES
<TABLE>
<S> <C>
TRANSACTION EXPENSES
Sales Load Imposed on Purchase Payments............................................ $ 0
Deferred Sales Load (as a percentage of Purchase Payments withdrawn) (1)
Number of Account Years Purchase Payment in Account
0-1............................................................................ 6%
2-3............................................................................ 5%
4-5............................................................................ 4%
6.............................................................................. 3%
7 or more...................................................................... 0%
Transfer Fee (2)................................................................... $ 0
ANNUAL ACCOUNT FEE per Contract or Certificate (3) $ 30
VARIABLE ACCOUNT ANNUAL EXPENSES (as a percentage of average Variable Account
assets)
Mortality and Expense Risk Charge................................................ 1.25%
Administrative Expense Charge.................................................... 0.15%
Other Fees and Expenses of the Variable Account.................................. 0.00%
-----
Total Variable Account Annual Expenses............................................. 1.40%
</TABLE>
- ------------------------
(1) A portion of your Account may be withdrawn each year without imposition of
any withdrawal charge, and after a Purchase Payment has been in your Account
for 7 Account Years it may be withdrawn free of the withdrawal charge.
(2) A Market Value Adjustment may be imposed on amounts transferred from or
within the Fixed Account.
(3) The Annual Account Fee is the lesser of $30 and 2% of your Account Value in
Account Years 1 through 5; thereafter, the fee may be changed annually, but
it may not exceed the lesser of $50 and 2% of your Account Value.
4
<PAGE>
SERIES FUND ANNUAL EXPENSES (1)
(AS A PERCENTAGE OF SERIES FUND NET ASSETS)
<TABLE>
<CAPTION>
OTHER TOTAL FUND
MANAGEMENT EXPENSES(2) EXPENSES
FEES (AFTER REIMBURSEMENT) (AFTER REIMBURSEMENT)
--------------- ------------------------ ------------------------
<S> <C> <C> <C>
Bond Series(3).................................... 0.60% 0.43% 1.03%
Capital Appreciation Series....................... 0.73% 0.04% 0.77%
Capital Opportunities Series...................... 0.75% 0.11% 0.86%
Emerging Growth Series............................ 0.72% 0.06% 0.78%
Equity Income Series(3)........................... 0.75% 0.28% 1.03%(3)
Global Asset Allocation Series.................... 0.75% 0.15% 0.90%
Global Governments Series......................... 0.75% 0.13% 0.88%
Global Growth Series.............................. 0.90% 0.11% 1.01%
Global Total Return Series........................ 0.75% 0.18% 0.93%
Government Securities Series...................... 0.55% 0.07% 0.62%
High Yield Series................................. 0.75% 0.07% 0.82%
International Growth Series....................... 0.98% 0.34% 1.32%
International Growth and Income Series............ 0.98% 0.18% 1.16%
Managed Sectors Series............................ 0.74% 0.06% 0.80%
Massachusetts Investors Growth Stock Series....... 0.75% 0.22% 0.97%
Massachusetts Investors Trust Series.............. 0.55% 0.04% 0.59%
MFS/Foreign & Colonial Emerging Markets Equity
Series........................................... 1.25% 0.25% 1.50%
Money Market Series............................... 0.50% 0.06% 0.56%
New Discovery Series(3)........................... 0.90% 0.38% 1.28%(3)
Research Series................................... 0.70% 0.06% 0.76%
Research Growth and Income Series................. 0.75% 0.20% 0.95%
Research International Series(3).................. 1.00% 0.55% 1.55%(3)
Strategic Income Series(3)........................ 0.75% 0.54% 1.29%(3)
Total Return Series............................... 0.65% 0.05% 0.70%
Utilities Series.................................. 0.75% 0.11% 0.86%
</TABLE>
- ------------------------
(1) The information relating to Series Fund expenses was provided by the Series
Fund and we have not independently verified it. You should consult the
Series Fund prospectus for more information about Series Fund expenses
(2) Each Series has an expense offset arrangement which reduces the Series'
custodian fee based upon the amount of cash maintained by the Series with
its custodian and dividend disbursing agent, and may enter into such other
arrangements and directed brokerage arrangements (which would also have the
effect of reducing the series' expenses). Any such fee reductions are not
reflected under "Other Expenses."
(3) "Other Expenses" and "Total Fund Expenses" are based on actual expenses for
the fiscal year ended December 31, 1998, net of any expense reimbursement
and/or fee waiver. MFS has agreed to bear the expenses of certain of the
Series (excluding management fees, taxes, extraordinary expenses and
brokerage and transaction costs) in excess of the following annual
percentage of such Series' average daily net assets:
<TABLE>
<S> <C>
Bond Series...................................................... 0.40%
Equity Income Series............................................. 0.25%
New Discovery Series............................................. 0.35%
Research International Series.................................... 0.50%
Strategic Income Series.......................................... 0.50%
</TABLE>
Without taking into account the fee waiver and/or expense reimbursement,
expenses for these Series would have been as follows: Bond Series -- Other
Expenses 0.47% and Total Fund Expenses 1.07%; Equity Income Series -- Other
Expenses 0.76% and Total Fund Expenses 1.51%; New Discovery Series -- Other
Expenses 0.70% and Total Fund Expenses 1.60%; Research International Series
-- Other Expenses 2.86% and Total Fund Expenses 3.86%; and Strategic Income
Series -- Other Expenses 0.67% and Total Fund Expenses 1.42%.
These arrangements will remain in effect until at least May 1, 2000, absent
earlier modification by the Series' Board of Trustees.
5
<PAGE>
EXAMPLES
If you surrender your Contract at the end of the applicable time period,
you would pay the following expenses on a $1,000 investment, assuming a 5%
annual return:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Bond Series............................................................... $ 81 $ 118 $ 160 $ 287
Capital Appreciation Series............................................... $ 79 $ 110 $ 147 $ 261
Capital Opportunities Series.............................................. $ 79 $ 113 $ 152 $ 270
Emerging Growth Series.................................................... $ 79 $ 110 $ 148 $ 262
Equity Income Series...................................................... $ 81 $ 118 $ 160 $ 287
Global Asset Allocation Series............................................ $ 80 $ 114 $ 154 $ 274
Global Governments Series................................................. $ 80 $ 113 $ 153 $ 272
Global Growth Series...................................................... $ 81 $ 117 $ 159 $ 285
Global Total Return Series................................................ $ 80 $ 115 $ 155 $ 277
Government Securities Series.............................................. $ 77 $ 106 $ 140 $ 245
High Yield Series......................................................... $ 79 $ 112 $ 150 $ 266
International Growth Series............................................... $ 84 $ 126 $ 173 $ 315
International Growth and Income Series.................................... $ 82 $ 121 $ 166 $ 299
Managed Sectors Series.................................................... $ 79 $ 111 $ 149 $ 264
Massachusetts Investors Growth Stock Series............................... $ 81 $ 116 $ 157 $ 281
Massachusetts Investors Trust Series...................................... $ 77 $ 105 $ 139 $ 242
MFS/Foreign & Colonial Emerging Markets Equity Series..................... $ 86 $ 131 $ 182 $ 332
Money Market Series....................................................... $ 77 $ 104 $ 137 $ 239
New Discovery Series...................................................... $ 83 $ 125 $ 172 $ 311
Research Series........................................................... $ 79 $ 110 $ 147 $ 260
Research Growth and Income Series......................................... $ 80 $ 115 $ 156 $ 279
Research International Series............................................. $ 86 $ 132 $ 184 $ 336
Strategic Income Series................................................... $ 84 $ 125 $ 172 $ 312
Total Return Series....................................................... $ 78 $ 108 $ 144 $ 253
Utilities Series.......................................................... $ 79 $ 113 $ 152 $ 270
</TABLE>
If you do NOT surrender your Contract, or if you annuitize at the end of
the applicable time period, you would pay the following expenses on a $1,000
investment, assuming a 5% annual return:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Bond Series............................................................... $ 26 $ 79 $ 135 $ 287
Capital Appreciation Series............................................... $ 23 $ 71 $ 122 $ 261
Capital Opportunities Series.............................................. $ 24 $ 74 $ 126 $ 270
Emerging Growth Series.................................................... $ 23 $ 71 $ 122 $ 262
Equity Income Series...................................................... $ 26 $ 79 $ 135 $ 287
Global Asset Allocation Series............................................ $ 24 $ 75 $ 128 $ 274
Global Governments Series................................................. $ 24 $ 74 $ 127 $ 272
Global Growth Series...................................................... $ 25 $ 78 $ 134 $ 285
Global Total Return Series................................................ $ 25 $ 76 $ 130 $ 277
Government Securities Series.............................................. $ 22 $ 66 $ 114 $ 245
High Yield Series......................................................... $ 24 $ 72 $ 124 $ 266
International Growth Series............................................... $ 29 $ 87 $ 149 $ 315
International Growth and Income Series.................................... $ 27 $ 83 $ 141 $ 299
Managed Sectors Series.................................................... $ 23 $ 72 $ 123 $ 264
Massachusetts Investors Growth Stock Series............................... $ 25 $ 77 $ 132 $ 281
Massachusetts Investors Trust Series...................................... $ 21 $ 65 $ 112 $ 242
MFS/Foreign & Colonial Emerging Markets Equity Series..................... $ 30 $ 93 $ 158 $ 332
Money Market Series....................................................... $ 21 $ 65 $ 111 $ 239
New Discovery Series...................................................... $ 28 $ 86 $ 147 $ 311
Research Series........................................................... $ 23 $ 71 $ 121 $ 260
Research Growth and Income Series......................................... $ 25 $ 76 $ 131 $ 279
Research International Series............................................. $ 31 $ 94 $ 160 $ 336
Strategic Income Series................................................... $ 28 $ 87 $ 147 $ 312
Total Return Series....................................................... $ 22 $ 69 $ 118 $ 253
Utilities Series.......................................................... $ 24 $ 74 $ 126 $ 270
</TABLE>
THE EXAMPLES SHOULD NOT BE CONSIDERED TO BE REPRESENTATIONS OF PAST OR
FUTURE EXPENSES, AND ACTUAL EXPENSES MAY BE GREATER OR LOWER THAN THOSE SHOWN.
6
<PAGE>
CONDENSED FINANCIAL INFORMATION
Historical information about the value of the units we use to measure the
variable portion of your Contract ("Variable Accumulation Units") is included in
the back of this Prospectus as Appendix B.
THE MFS REGATTA GOLD ANNUITY
Sun Life Assurance Company of Canada (U.S.) (the "Company", "we" or "us")
and Sun Life of Canada (U.S.) Variable Account F (the "Variable Account") offer
the MFS Regatta Gold Annuity on a group basis in connection with retirement
plans. We issue a Group Contract to the Owner covering all individuals
participating under the Group Contract. Each individual receives a Certificate
that evidences his or her participation under the Group Contract.
In this Prospectus, unless we state otherwise, we refer to participating
individuals under Group Contracts as "Participants" and we address Participants
as "you"; we use the term "Contracts" to include Group Contracts and
Certificates issued under Group Contracts. For the purpose of determining
benefits under the Contracts, we establish an Account for each Participant,
which we will refer to as "your" Account or a "Participant Account."
The Contract provides a number of important benefits for your retirement
planning. It has an Accumulation Phase, during which you make payments under the
Contract and allocate them to one or more Variable Account or Fixed Account
options, and an Income Phase, during which we make payments based on the amount
you have accumulated. The Contract provides tax deferral, so that you do not pay
taxes on your earnings under the Contract until you withdraw them. It provides a
death benefit if the Annuitant dies during the Accumulation Phase. Finally, if
you so elect, during the Income Phase we will make payments to you or someone
else for life or for another period that you choose.
You choose these benefits on a variable or fixed basis or a combination of
both. When you choose variable investment options or a Variable Annuity option,
your benefits will be responsive to changes in the economic environment,
including inflationary forces and changes in rates of return available from
different types of investments. With these options, you assume all investment
risk under the Contract. When you choose a Guarantee Period in our Fixed Account
or a Fixed Annuity option, we assume the investment risk, except in the case of
early withdrawals, where you bear the risk of unfavorable interest rate changes.
You also bear the risk that the interest rates we will offer in the future and
the rates we will use in determining your Fixed Annuity may not exceed our
minimum guaranteed rate, which is 3% per year, compounded annually.
The Contracts are designed for use in connection with retirement and
deferred compensation plans, some of which qualify for favorable federal income
tax treatment under Sections 401, 403, 408 or 408A of the Internal Revenue Code.
The Contracts are also designed so that they may be used in connection with
certain non-tax-qualified retirement plans, such as payroll savings plans and
such other groups (trusteed or nontrusteed) as may be eligible under applicable
law. We refer to Contracts used with plans that receive favorable tax treatment
as "Qualified Contracts," and all others as "Non-Qualified Contracts."
COMMUNICATING TO US ABOUT YOUR CONTRACT
All materials sent to us, including Purchase Payments, must be sent to our
Annuity Service Mailing Address set forth on the first page of this Prospectus.
For all telephone communications, you must call (800) 752-7215 or (617)
348-9600.
Unless this Prospectus states differently, we will consider all materials
sent to us and all telephone communications to be received on the date we
actually receive them at the Annuity Service Mailing Address. However, we will
consider Purchase Payments, withdrawal requests and transfer instructions to be
received on the next Business Day if we receive them (1) on a day that is not a
Business Day or (2) after 4:00 p.m., Eastern Time.
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When we specify that notice to us must be in writing, we reserve the
right, in our sole discretion, to accept notice in another form.
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
We are a stock life insurance company incorporated under the laws of
Delaware on January 12, 1970. We do business in 48 states, the District of
Columbia, and Puerto Rico, and we have an insurance company subsidiary that does
business in New York. Our Executive Office mailing address is One Sun Life
Executive Park, Wellesley Hills, Massachusetts 02481.
We are an indirect wholly-owned subsidiary of Sun Life Assurance Company
of Canada ("Sun Life (Canada)"). Sun Life (Canada) is a mutual life insurance
company incorporated pursuant to Act of Parliament of Canada in 1865 and
currently transacts business in all of the Canadian provinces and territories,
all U.S. states (except New York), the District of Columbia, Puerto Rico, the
Virgin Islands, Great Britain, Ireland, Hong Kong, Bermuda and the Philippines.
THE VARIABLE ACCOUNT
We established the Variable Account as a separate account on July 13,
1989, pursuant to a resolution of our Board of Directors. Under Delaware
insurance law and the Contract, the income, gains or losses of the Variable
Account are credited to or charged against the assets of the Variable Account
without regard to the other income, gains, or losses of the Company. These
assets are held in relation to the Contracts described in this Prospectus and
other variable annuity contracts that provide benefits that vary in accordance
with the investment performance of the Variable Account. Although the assets
maintained in the Variable Account will not be charged with any liabilities
arising out of any other business we conduct, all obligations arising under the
Contracts, including the promise to make annuity payments, are general corporate
obligations of the Company.
The assets of the Variable Account are divided into Sub-Accounts. Each
Sub-Account invests exclusively in shares of a specific Series of the MFS/Sun
Life Series Trust (the "Series Fund"). All amounts allocated to the Variable
Account will be used to purchase Series Fund shares as designated by you at
their net asset value. Any and all distributions made by the Series Fund with
respect to the shares held by the Variable Account will be reinvested to
purchase additional shares at their net asset value. Deductions from the
Variable Account for cash withdrawals, annuity payments, death benefits, Account
Fees, contract charges against the assets of the Variable Account for the
assumption of mortality and expense risks, administrative expenses and any
applicable taxes will, in effect, be made by redeeming the number of Series Fund
shares at their net asset value equal in total value to the amount to be
deducted. The Variable Account will be fully invested in Series Fund shares at
all times.
VARIABLE ACCOUNT OPTIONS:
THE MFS/SUN LIFE SERIES TRUST
The MFS/Sun Life Series Trust (the "Series Fund") is an open-end
management investment company registered under the Investment Company Act of
1940. Our affiliate, Massachusetts Financial Services Company ("MFS"), serves as
the investment adviser to the Series Fund.
The Series Fund is composed of 26 independent portfolios of securities,
each of which has separate investment objectives and policies. Shares of the
Series Fund are issued in 26 Series, each corresponding to one of the
portfolios. The Contracts provide for investment by the Sub-Accounts in shares
of the 25 Series of the Series Fund described below. Additional portfolios may
be added to the Series Fund which may or may not be available for investment by
the Variable Account.
BOND SERIES will primarily seek as high a level of current income as is
believed to be consistent with prudent investment risk; its secondary
objective is to seek to protect shareholders' capital.
CAPITAL APPRECIATION SERIES will seek to maximize capital appreciation by
investing in securities of all types, with major emphasis on common stocks.
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CAPITAL OPPORTUNITIES SERIES will seek capital appreciation.
EMERGING GROWTH SERIES will seek long-term growth of capital.
EQUITY INCOME SERIES will primarily seek reasonable income by investing
mainly in income producing securities; its secondary objective is to seek
capital appreciation.
GLOBAL ASSET ALLOCATION SERIES (formerly, the World Asset Allocation
Series) will seek total return over the long term through investments in
equity and fixed income securities and will also seek to have low
volatility of share price (I.E., net asset value per share) and reduced
risk (compared to an aggressive equity/fixed income portfolio).
GLOBAL GOVERNMENTS SERIES (formerly, the World Governments Series) will
seek to provide moderate current income, preservation of capital and growth
of capital by investing in debt obligations that are issued or guaranteed
as to principal and interest by either (i) the U.S. Government, its
agencies, authorities, or instrumentalities, or (ii) the governments of
foreign countries (to the extent that the Series' adviser believes that the
higher yields available from foreign government securities are sufficient
to justify the risks of investing in these securities).
GLOBAL GROWTH SERIES (formerly, the World Growth Series) will seek capital
appreciation by investing in securities of companies worldwide growing at
rates expected to be well above the growth rate of the overall U.S.
economy.
GLOBAL TOTAL RETURN SERIES (formerly, the World Total Return Series) will
seek total return by investing in securities which will provide above
average current income (compared to a portfolio invested entirely in equity
securities) and opportunities for long-term growth of capital and income.
GOVERNMENT SECURITIES SERIES will seek current income and preservation of
capital by investing in U.S. Government and U.S. Government-related
securities.
HIGH YIELD SERIES will seek high current income and capital appreciation by
investing primarily in certain lower rated or unrated securities (possibly
with equity features) of U.S. and foreign issuers (also known as "junk
bonds").
INTERNATIONAL GROWTH SERIES will seek capital appreciation.
INTERNATIONAL GROWTH AND INCOME SERIES will seek capital appreciation and
current income.
MANAGED SECTORS SERIES will seek capital appreciation by varying the
weighting of its portfolio among 13 industry sectors.
MASSACHUSETTS INVESTORS GROWTH STOCK SERIES will seek to provide long-term
growth of capital and future income rather than current income.
MASSACHUSETTS INVESTORS TRUST SERIES (formerly, the Conservative Growth
Series) will seek long-term growth of capital and future income while
providing more current dividend income than is normally obtainable from a
portfolio of only growth stocks.
MFS/FOREIGN & COLONIAL EMERGING MARKETS EQUITY SERIES will seek capital
appreciation.
MONEY MARKET SERIES will seek maximum current income to the extent
consistent with stability of principal by investing exclusively in money
market instruments maturing in less than 13 months.
NEW DISCOVERY SERIES will seek capital appreciation.
RESEARCH SERIES will seek to provide long-term growth of capital and future
income.
RESEARCH GROWTH AND INCOME SERIES will seek to provide long-term growth of
capital, current income and growth of income.
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RESEARCH INTERNATIONAL SERIES will seek capital appreciation.
STRATEGIC INCOME SERIES will seek to provide high current income by
investing in fixed income securities and will seek to take advantage of
opportunities to realize significant capital appreciation while maintaining
a high level of current income.
TOTAL RETURN SERIES will seek primarily to obtain above-average income
(compared to a portfolio entirely invested in equity securities) consistent
with prudent employment of capital; its secondary objective is to take
advantage of opportunities for growth of capital and income since many
securities offering a better than average yield may also possess growth
potential.
UTILITIES SERIES will seek capital growth and current income (income above
that available from a portfolio invested entirely in equity securities) by
investing, under normal market conditions, at least 65% of its assets in
equity and debt securities of both domestic and foreign companies in the
utilities industry.
The Series Fund pays fees to MFS for its services pursuant to investment
advisory agreements. MFS also serves as investment adviser to each of the funds
in the MFS Family of Funds, and to certain other investment companies
established by MFS and/or us. MFS Institutional Advisers, Inc., a wholly-owned
subsidiary of MFS, provides investment advice to substantial private clients.
MFS and its predecessor organizations have a history of money management dating
from 1924. MFS operates as an autonomous organization and the obligation of
performance with respect to the investment advisory and underwriting agreements
(including supervision of the sub-advisers noted below) is solely that of MFS.
We undertake no obligation in this regard.
MFS has retained Foreign & Colonial Management Limited ("FCM") and its
subsidiary, Foreign & Colonial Emerging Markets Limited ("FCEM"), as
sub-advisers to manage the MFS/Foreign & Colonial Emerging Markets Series and to
manage the assets of the Global Growth Series.
MFS may serve as the investment adviser to other mutual funds which have
similar investment goals and principal investment policies and risks as the
Series, and which may be managed by a Series' portfolio manager(s). While a
Series may have many similarities to these other funds, its investment
performance will differ from their investment performance. This is due to a
number of differences between a Series and these similar products, including
differences in sales charges, expense ratios and cash flows.
The Series Fund also offers its shares to other separate accounts
established by the Company and our New York subsidiary in connection with
variable annuity and variable life insurance contracts. Although we do not
anticipate any disadvantages to this arrangement, there is a possibility that a
material conflict may arise between the interests of the Variable Account and
one or more of the other separate accounts investing in the Series Fund. A
conflict may occur due to differences in tax laws affecting the operations of
variable life and variable annuity separate accounts, or some other reason. We
and the Series Fund's Board of Trustees will monitor events for such conflicts,
and, in the event of a conflict, we will take steps necessary to remedy the
conflict, including withdrawal of the Variable Account from participation in the
Series which is involved in the conflict or substitution of shares of other
Series or other mutual funds.
MORE COMPREHENSIVE INFORMATION ABOUT THE SERIES FUND AND THE MANAGEMENT,
INVESTMENT OBJECTIVES, POLICIES, RESTRICTIONS, EXPENSES AND POTENTIAL RISKS OF
EACH SERIES MAY BE FOUND IN THE ACCOMPANYING CURRENT PROSPECTUS OF THE SERIES
FUND. YOU SHOULD READ THE SERIES FUND PROSPECTUS CAREFULLY BEFORE INVESTING. THE
SERIES FUND'S STATEMENT OF ADDITIONAL INFORMATION IS AVAILABLE BY CALLING
1-800-752-7215.
THE FIXED ACCOUNT
The Fixed Account is made up of all the general assets of the Company
other than those allocated to any separate account. Amounts you allocate to
Guarantee Periods become part of the Fixed Account, and are available to fund
the claims of all classes of our customers, including claims for benefits under
the Contracts.
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We will invest the assets of the Fixed Account in those assets we choose
that are allowed by applicable state insurance laws. In general, these laws
permit investments, within specified limits and subject to certain
qualifications, in federal, state and municipal obligations, corporate bonds,
preferred and common stocks, real estate mortgages, real estate and certain
other investments. We intend to invest primarily in investment-grade fixed
income securities (i.e. rated by a nationally recognized rating service within
the four highest grades) or instruments we believe are of comparable quality. We
are not obligated to invest amounts allocated to the Fixed Account according to
any particular strategy, except as may be required by applicable state insurance
laws. You will not have a direct or indirect interest in the Fixed Account
investments.
THE FIXED ACCOUNT OPTIONS:
THE GUARANTEE PERIODS
You may elect one or more Guarantee Period(s) from those we make available
from time to time. We publish Guaranteed Interest Rates for each Guarantee
Period offered. We may change the Guaranteed Interest Rates we offer from time
to time, but no Guaranteed Interest Rate will ever be less than 3% per year,
compounded annually. Also, once we have accepted your allocation to a particular
Guarantee Period, we promise that the Guaranteed Interest Rate applicable to
that allocation will not change for the duration of the Guarantee Period.
We determine Guaranteed Interest Rates in our discretion. We do not have a
specific formula for establishing the rates for different Guarantee Periods. Our
determination will be influenced by the interest rates on fixed income
investments in which we may invest with amounts allocated to the Guarantee
Periods. We will also consider other factors in determining these rates,
including regulatory and tax requirements, sales commissions and administrative
expenses borne by us, general economic trends and competitive factors. We cannot
predict the level of future interest rates.
We may from time to time in our discretion offer interest rate specials
for new Purchase Payments that are higher than the rates we are then offering
for renewals on transfers.
Early withdrawals from your allocation to a Guarantee Period, including
cash withdrawals, transfers, and commencement of an annuity, may be subject to a
Market Value Adjustment, which could decrease or increase the value of your
Account. See "Cash Withdrawals, Withdrawal Charge, and Market Value Adjustment."
THE ACCUMULATION PHASE
During the Accumulation Phase of your Contract, you make payments into
your Account, and your earnings accumulate on a tax-deferred basis. The
Accumulation Phase begins with our acceptance of your first Purchase Payment and
ends the Business Day before your Annuity Commencement Date. The Accumulation
Phase will end sooner if you surrender your Contract or die before the Annuity
Commencement Date.
ISSUING YOUR CONTRACT
When you purchase a Contract, a completed Application and the initial
Purchase Payment are sent to us for acceptance. When we accept a Group Contract,
we issue the Contract to the Owner; we issue a Certificate to you as a
Participant when we accept your Application.
We will credit your initial Purchase Payment to your Account within two
business days of receiving your completed Application. If your Application is
not complete, we will notify you. If we do not have the necessary information to
complete the Application within 5 business days, we will send your money back to
you or ask your permission to retain your Purchase Payment until the Application
is made complete. Then we will apply the Purchase Payment within 2 business days
of when the Application is complete.
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AMOUNT AND FREQUENCY OF PURCHASE PAYMENTS
The amount of Purchase Payments may vary; however, we will not accept an
initial Purchase Payment of less than $5,000, and each additional Purchase
Payment must be at least $1,000, unless we waive these limits. In addition, we
will not accept a Purchase Payment if your Account Value is over $1 million, or
if the Purchase Payment would cause your Account Value to exceed $1 million,
unless we have approved the Payment in advance. Within these limits, you may
make Purchase Payments at any time during the Accumulation Phase.
ALLOCATION OF NET PURCHASE PAYMENTS
You may allocate your Purchase Payments among the different Sub-Accounts
and Guarantee Periods we offer. At any time, you may have amounts allocated
among up to 18 of the available options.
In your Application, you may specify the percentage of each Purchase
Payment to be allocated to each Sub-Account or Guarantee Period. These
percentages are called your allocation factors. You may change the allocation
factors for future Payments by sending us written notice of the change, on our
required form. We will use your new allocation factors for the first Purchase
Payment we receive with or after we have received notice of the change, and for
all future Purchase Payments, until we receive another change notice.
Although it is currently not our practice, we may deduct applicable
premium or similar taxes from your Purchase Payments. See "Contract Charges --
Premium Taxes." In that case, we will credit your Net Purchase Payment, which is
the Purchase Payment minus the amount of those taxes.
YOUR ACCOUNT
When we accept your first Purchase Payment, we establish an Account for
you, which we maintain throughout the Accumulation Phase of your Contract.
YOUR ACCOUNT VALUE
Your Account Value is the sum of the value of the two components of your
Contract: the Variable Account portion of your Contract ("Variable Account
Value") and the Fixed Account portion of your Contract ("Fixed Account Value").
These two components are calculated separately, as described below.
VARIABLE ACCOUNT VALUE
VARIABLE ACCUMULATION UNITS
In order to calculate your Variable Account Value, we use a measure called
a Variable Accumulation Unit for each Sub-Account. Your Variable Account Value
is the sum of your Account Value in each Sub-Account, which is the number of
your Variable Accumulation Units for that Sub-Account times the value of each
Unit.
VARIABLE ACCUMULATION UNIT VALUE
The value of each Variable Accumulation Unit in a Sub-Account reflects the
net investment performance of that Sub-Account. We determine that value once on
each day that the New York Stock Exchange is open for trading (a "Business
Day"), at the close of trading, which is currently 4:00 p.m., Eastern Time. The
period that begins at the time Variable Accumulation Units are valued on a
Business Day and ends at that time on the next Business Day is called a
Valuation Period. On days other than Business Days, the value of a Variable
Accumulation Unit does not change.
To measure these values, we use a factor -- which we call the Net
Investment Factor-- which represents the net return on the Sub-Account's assets.
At the end of any Valuation Period, the value of a Variable Accumulation Unit
for a Sub-Account is equal to the value of that Sub-Account's Variable
Accumulation Units at the end of the previous Valuation Period, multiplied by
the Net Investment
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Factor. We calculate the Net Investment Factor by dividing (1) the net asset
value of a Series share held in the Sub-Account at the end of that Valuation
Period, plus the per share amount of any dividend or capital gains distribution
made by that Series during the Valuation Period, by (2) the net asset value per
share of the Series share at the end of the previous Valuation Period; we then
deduct a factor representing the mortality and expense risk charge and
administrative expense charge. See "Contract Charges."
For a hypothetical example of how we calculate the value of a Variable
Accumulation Unit, see the Statement of Additional Information.
CREDITING AND CANCELING VARIABLE ACCUMULATION UNITS
When we receive an allocation to a Sub-Account, either from a Net Purchase
Payment or a transfer of Account Value, we credit that amount to your Account in
Variable Accumulation Units. Similarly, we cancel Variable Accumulation Units
when you transfer or withdraw amounts from a Sub-Account, or when we deduct
certain charges under the Contract. We determine the number of Units credited or
canceled by dividing the dollar amount by the Variable Accumulation Unit value
for that Sub-Account at the end of the Valuation Period during which the
transaction or charge is effective.
FIXED ACCOUNT VALUE
Your Fixed Account value is the sum of all amounts allocated to Guarantee
Periods, either from Net Purchase Payments, transfers or renewals, plus interest
credited on those amounts, and minus withdrawals, transfers out of Guarantee
Periods, and any deductions for charges under the Contract taken from your Fixed
Account Value.
CREDITING INTEREST
We credit interest on amounts allocated to a Guarantee Period at the
applicable Guaranteed Interest Rate for the duration of the Guarantee Period.
The Guarantee Period begins the day we apply your allocation and ends when the
number of calendar years (or months if the Guarantee Period is less than one
year) in the Guarantee Period (measured from the end of the calendar month in
which the amount was allocated to the Guarantee Period) have elapsed. The last
day of the Guarantee Period is its Expiration Date. During the Guarantee Period,
we credit interest daily at a rate that yields the Guaranteed Interest Rate on
an annual effective basis.
GUARANTEE AMOUNTS
Each separate allocation you make to a Guarantee Period, together with
interest credited thereon, is called a Guarantee Amount. Each Guarantee Amount
is treated separately for purposes of determining the Market Value Adjustment.
RENEWALS
We will notify you in writing between 45 and 75 days before the Expiration
Date for any Guarantee Amount. A new Guarantee Period of the same duration will
begin automatically for that Guarantee Amount on the first day following the
Expiration Date, unless before the Expiration Date we receive (1) written notice
from you electing a different Guarantee Period from among those we then offer or
(2) instructions to transfer all or some of the Guarantee Amount to one or more
Sub-Accounts, in accordance with the transfer privilege provisions of the
Contract. Each new allocation to a Guarantee Period must be at least $1,000.
EARLY WITHDRAWALS
If you withdraw, transfer, or annuitize an allocation to a Guarantee
Period before the Expiration Date, we will apply a Market Value Adjustment to
the transaction. This could result in an increase or decrease of your Account
Value, depending on interest rates at the time. You bear the risk that you will
receive less than your principal if the Market Value Adjustment applies.
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TRANSFER PRIVILEGE
PERMITTED TRANSFERS
During the Accumulation Phase, you may transfer all or part of your
Account Value to one or more Sub-Accounts or Guarantee Periods then available,
subject to the following restrictions:
- you may not make more than 12 transfers in any Account Year;
- the amount transferred from a Sub-Account must be at least $1,000
unless you are transferring your entire balance in that Sub-Account;
- your Account Value remaining in a Sub-Account must be at least $1,000;
- the amount transferred from a Guarantee Period must be the entire
Guarantee Amount, except for transfers of interest credited during the
current Account Year;
- at least 30 days must elapse between transfers to or from Guarantee
Periods;
- transfers to or from Sub-Accounts are subject to terms and conditions
that may be imposed by the Series Fund; and
- we impose additional restrictions on market timers, which are further
described below.
These restrictions do not apply to transfers made under an approved dollar
cost averaging program.
There is usually no charge imposed on transfers; however, we reserve the
right to impose a transfer charge of $15 for each transfer. Transfers out of a
Guarantee Period more than 30 days before expiration of the period will be
subject to the Market Value Adjustment described below. Under current law there
is no tax liability for transfers.
REQUESTS FOR TRANSFERS
You may request transfers in writing or by telephone. The telephone
transfer privilege is available automatically, and does not require your written
election. We will require personal identifying information to process a request
for transfer made by telephone. We will not be liable for following instructions
communicated by telephone that we reasonably believe are genuine.
If we receive your transfer request before 4:00 p.m. Eastern Time on a
Business Day, it will be effective that day. Otherwise, it will be effective the
next Business Day.
MARKET TIMERS
The Contracts are not designed for professional market timing
organizations or other entities using programmed and frequent transfers. If you
wish to employ such strategies, you should not purchase a Contract. Accordingly,
transfers may be subject to restrictions if exercised by a market timing firm or
any other third party authorized to initiate transfer transactions on behalf of
multiple Participants. In imposing such restrictions, we may, among other
things, not accept (1) the transfer instructions of any agent acting under a
power of attorney on behalf of more than one Participant, or (2) the transfer
instructions of individual Participants who have executed preauthorized transfer
forms that are submitted at the same time by market timing firms or other third
parties on behalf of more than one Participant. We will not impose these
restrictions unless our actions are reasonably intended to prevent the use of
such transfers in a manner that will disadvantage or potentially impair the
Contract rights of other Participants.
In addition, the Series Fund has reserved the right to temporarily or
permanently refuse exchange requests from the Variable Account if, in MFS'
judgment, a Series would be unable to invest effectively in accordance with its
investment objective and policies, or would otherwise potentially be adversely
affected. In particular, a pattern of exchanges that coincide with a market
timing strategy may be disruptive to a Series and therefore may be refused.
Accordingly, the Variable Account may not be in a position to effectuate
transfers and may refuse transfer requests without prior notice. We also
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reserve the right, for similar reasons, to refuse or delay exchange requests
involving transfers to or from the Fixed Account.
WAIVERS; REDUCED CHARGES; CREDITS; BONUS GUARANTEED INTEREST RATES
We may reduce or waive the withdrawal charge or Account Fee, credit
additional amounts, or grant bonus Guaranteed Interest Rates in certain
situations. These situations may include sales of Contracts (1) where selling
and/or maintenance costs associated with the Contracts are reduced, such as the
sale of several Contracts to the same Participant, sales of large Contracts, and
certain group sales, and (2) to officers, directors and employees of the Company
or its affiliates, registered representatives and employees of broker-dealers
with a current selling agreement with the Company and affiliates of such
representatives and broker-dealers, employees of affiliated asset management
firms, and persons who have retired from such positions ("Eligible Employees")
and immediate family members of Eligible Employees. Eligible Employees and their
immediate family members may also purchase a Contract without regard to minimum
Purchase Payment requirements. For other situations in which withdrawal charges
may be waived, see "Withdrawals, Withdrawal Charge and Market Value Adjustment."
OPTIONAL PROGRAMS
DOLLAR COST AVERAGING
Dollar cost averaging allows you to invest gradually, over time, in up to
12 Sub-Accounts. You may select a dollar cost averaging program at no extra
charge by allocating a minimum of $1,000 to a designated Sub-Account or to a
Guarantee Period we make available in connection with the program. Amounts
allocated to the Fixed Account under the program will earn interest at a rate
declared by the Company for the Guarantee Period you select. Each month or
quarter, as you select, we will transfer the same amount automatically to one or
more Sub-Accounts that you choose, up to a maximum of 12 Sub-Accounts. The
program continues until your Account Value allocated to the program is depleted
or you elect to stop the program. The final amount transferred from the Fixed
Account will include all interest earned.
Only Purchase Payments may be allocated to a dollar cost averaging
program. Previously applied amounts may not be transferred to a dollar cost
averaging program.
No Market Value Adjustment (either positive or negative) will apply to
amounts automatically transferred from the Fixed Account under the dollar cost
averaging program, except that if you discontinue or alter the program prior to
completion, amounts remaining in the Fixed Account will be transferred to the
Money Market Series Sub-Account, unless you instruct us otherwise, and the
Market Value Adjustment will be applied. Any new allocation of a Purchase
Payment to the program will be treated as commencing a new dollar cost averaging
program and is subject to the $1,000 minimum.
The main objective of a dollar cost averaging program is to minimize the
impact of short-term price fluctuations on Account Value. Since you transfer the
same dollar amount to the variable investment options at set intervals, dollar
cost averaging allows you to purchase more Variable Accumulation Units (and,
indirectly, more Series Fund shares) when prices are low and fewer Variable
Accumulation Units (and, indirectly, fewer Series Fund shares) when prices are
high. Therefore, you may achieve a lower average cost per Variable Accumulation
Unit over the long term. A dollar cost averaging program allows you to take
advantage of market fluctuations. However, it is important to understand that a
dollar cost averaging program does not assure a profit or protect against loss
in a declining market.
ASSET ALLOCATION
One or more asset allocation programs may be available in connection with
the Contracts, at no extra charge. Asset allocation is the process of investing
in different asset classes -- such as equity funds, fixed income funds, and
money market funds -- depending on your personal investment goals, tolerance for
risk, and investment time horizon. By spreading your money among a variety of
asset classes, you may be able to reduce the risk and volatility of investing,
although there are no guarantees, and asset allocation does not insure a profit
or protect against loss in declining market.
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Currently, you may select one of three asset allocation models, each of
which represents a combination of Sub-Accounts with a different level of risk.
The available models are the conservative asset allocation model, the moderate
asset allocation model, and the aggressive asset allocation model. Each model
allocates a different percentage of Account Value to Sub-Accounts investing in
the various asset classes, with the conservative model allocating the lowest
percentage to Sub-Accounts investing in the equity asset class and the
aggressive model allocating the highest percentage to the stock asset class.
These models, as well as the terms and conditions of the asset allocation
program, are fully described in a separate brochure. Additional programs may be
available in the future.
If you elect an asset allocation program, we will automatically allocate
your Purchase Payments among the Sub-Accounts represented in the model you
choose. By your election of an asset allocation program, you thereby authorize
us to automatically reallocate your Account Value on a quarterly basis to
reflect the current composition of the model you have selected, without further
instruction, until we receive notification that you wish to terminate the
program, or choose a different model.
SYSTEMATIC WITHDRAWAL AND INTEREST OUT PROGRAMS
If you have an Account Value of $10,000 or more, you may select our
Systematic Withdrawal or Interest Out Program.
Under the Systematic Withdrawal Program, you determine the amount and
frequency of regular withdrawals you would like to receive from your Fixed
and/or Variable Account Value and we will effect them automatically. Under the
Interest Out Program, we will automatically pay to you or reinvest interest
credited for all Guarantee Periods you have chosen. You may change or stop
either program at any time, by written notice to us. Withdrawals may be included
in income and subject to a 10% federal tax penalty, as well as all charges and
any Market Value Adjustment applicable upon withdrawal. You should consult your
adviser before choosing these options.
PORTFOLIO REBALANCING PROGRAM
Under the Portfolio Rebalancing Program, we transfer funds among the
Sub-Accounts to maintain the percentage allocation you have selected among these
Sub-Accounts. At your election, we will make these transfers on a quarterly,
semi-annual or annual basis.
Portfolio Rebalancing does not permit transfers to or from any Guarantee
Period.
SECURED FUTURE PROGRAM
Under this program, we divide your Purchase Payment between the Fixed
Account and the Variable Account. For the Fixed Account portion, you choose a
Guarantee Period from among those we offer, and we allocate to that Guarantee
Period the portion of your Purchase Payment necessary so that at the end of the
Guarantee Period, your Fixed Account allocation, including interest, will equal
the entire amount of your original Purchase Payment. The remainder of the
original Purchase Payment will be invested in Sub-Accounts of your choice. At
the end of the Guarantee Period, you will be guaranteed the amount of your
Purchase Payment (assuming no withdrawals), plus you will have the benefit, if
any, of the investment performance of the Sub-Accounts you have chosen.
WITHDRAWALS, WITHDRAWAL CHARGE AND MARKET VALUE ADJUSTMENT
CASH WITHDRAWALS
REQUESTING A WITHDRAWAL
At any time during the Accumulation Phase you may withdraw in cash all or
any portion of your Account Value. To make a withdrawal, you must send us a
written request at our Annuity Service Mailing Address. Your request must
specify whether you want to withdraw the entire amount of your Account or, if
less, the amount you wish to withdraw.
All withdrawals may be subject to a withdrawal charge (see "Withdrawal
Charge" below) and withdrawals from your Fixed Account Value also may be subject
to a Market Value Adjustment (see
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<PAGE>
"Market Value Adjustment" below). Upon request we will notify you of the amount
we would pay in the event of a full or partial withdrawal. Withdrawals also may
have adverse federal income tax consequences, including a 10% penalty tax. See
"Federal Tax Status." You should carefully consider these tax consequences
before requesting a cash withdrawal.
FULL WITHDRAWALS
If you request a full withdrawal, we calculate the amount we will pay you
as follows. We start with the total value of your Account at the end of the
Valuation Period during which we receive your withdrawal request; we deduct the
Account Fee for the Account Year in which the withdrawal is made; we add or
subtract the amount of any Market Value Adjustment applicable to your Fixed
Account Value; and finally, we deduct any applicable withdrawal charge.
A full withdrawal results in the surrender of your Contract, and
cancellation of all rights and privileges under your Contract.
PARTIAL WITHDRAWALS
If you request a partial withdrawal we will pay you the actual amount
specified in your request and then reduce the value of your Account by deducting
the amount paid, adding or deducting any Market Value Adjustment applicable to
amounts withdrawn from the Fixed Account, and deducting any applicable
withdrawal charge.
You may specify the amount you want withdrawn from each Sub-Account and/or
Guarantee Amount to which your Account is allocated. If you do not so specify,
we will deduct the total amount you request pro rata, based on your allocations
at the end of the Valuation Period during which we receive your request.
If you request a partial withdrawal that would result in your Account
Value being reduced to an amount less than the Account Fee for the Account Year
in which you make the withdrawal, we will treat it as a request for a full
withdrawal.
TIME OF PAYMENT
We will pay you the applicable amount of any full or partial withdrawal
within 7 days after we receive your withdrawal request, except in cases where we
are permitted to defer payment under the Investment Company Act of 1940 and
applicable state insurance law. Currently, we may defer payment of amounts you
withdraw from the Variable Account only for following periods:
- when the New York Stock Exchange is closed except weekends and holidays
or when trading on the New York Stock Exchange is restricted;
- when it is not reasonably practical to dispose of securities held by
the Series Fund or to determine the value of the net assets of the
Series Fund, because an emergency exists; or
- when an SEC order permits us to defer payment for the protection of
Participants.
We also may defer payment of amounts you withdraw from the Fixed Account for up
to 6 months from the date we receive your withdrawal request. We do not pay
interest on the amount of any payments we defer.
WITHDRAWAL RESTRICTIONS FOR QUALIFIED PLANS
If yours is a Qualified Contract, you should carefully check the terms of
the plan for limitations and restrictions on cash withdrawals.
Special restrictions apply to withdrawals from Contracts used for Section
403(b) annuities. See "Federal Tax Status -- Tax-Sheltered Annuities."
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<PAGE>
WITHDRAWAL CHARGE
We do not deduct any sales charge from your Purchase Payments when they
are made. However, we may impose a withdrawal charge (known as a "contingent
deferred sales charge") on certain amounts you withdraw. We impose this charge
to defray some of our expenses related to the sale of the Contracts, such as
commissions we pay to agents, the cost of sales literature, and other
promotional costs and transaction expenses.
If you purchased your Contract before November 1994, or if your state does
not permit our current withdrawal charge, we use the Alternate Withdrawal
Charge, described below.
The withdrawal charge will never be greater than 6% of the aggregate
amount of Purchase Payments you make under the Contract.
We may modify the withdrawal charges and limits, upon notice to the Owner
of the Group Contract. However, any modification will only apply to Accounts
established after the date of the modification.
FREE WITHDRAWAL AMOUNT
In each Account Year you may withdraw a portion of your Account Value --
which we will call the "free withdrawal amount" -- before incurring the
withdrawal charge. For any year, the free withdrawal amount is equal to (1) 10%
of the amount of all Purchase Payments you have made during the last 7 Account
Years, including the current Account Year (the "Annual Withdrawal Allowance"),
plus (2) the amount of all Purchase Payments made before the last 7 Account
Years that you have not previously withdrawn. Any portion of the Annual
Withdrawal Allowance that you do not use in an Account Year is cumulative; that
is, it is carried forward and available for use in future years.
For convenience, we refer to Purchase Payments made during the last 7
Account Years (including the current Account Year) as "New Payments," and all
Purchase Payments made before the last 7 Account Years as "Old Payments."
For example, assume you wish to make a withdrawal from your Contract in
Account Year 10. You made an initial Purchase Payment of $10,000 in Account Year
1, you made one additional Purchase Payment of $8,000 in Account Year 8, and you
have made no previous withdrawals. Your Account Value in Account Year 10 is
$35,000. The free withdrawal amount for Account Year 10 is $19,400, calculated
as follows:
- $800, which is the Annual Withdrawal Allowance for Account Year 10 (10%
of the $8,000 Purchase Payment made in Account Year 8, the only New
Payment); plus
- $8,600, which is the total of the unused Annual Withdrawal Allowances
of $1,000 for each of Account Years 1 through 7 and $800 for each of
Account Years 8 and 9 that are carried forward and available for use in
Account Year 10; plus
- $10,000, which is the amount of all Old Payments that you have not
previously withdrawn.
WITHDRAWAL CHARGE ON PURCHASE PAYMENTS
If you withdraw more than the free withdrawal amount in any Account Year,
we consider the excess amount to be withdrawn first from New Payments that you
have not previously withdrawn. We impose the withdrawal charge on the amount of
these New Payments. Thus, the maximum amount on which we will impose the
withdrawal charge in any year will never be more than the total of all New
Payments that you have not previously withdrawn.
The amount of your withdrawal, if any, that exceeds the total of the free
withdrawal amount plus the aggregate amount of all New Payments not previously
withdrawn, is not subject to the withdrawal charge.
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<PAGE>
ORDER OF WITHDRAWAL
New Payments are withdrawn on a first-in first-out basis until all New
Payments have been withdrawn. For example, assume the same facts as in the
example above. In Account Year 10 you wish to withdraw $25,000. We attribute the
withdrawal first to the free withdrawal amount of $19,400, which is not subject
to the withdrawal charge. The remaining $5,600 is withdrawn from the Purchase
Payment made in Account Year 8 (the only New Payment) and is subject to the
withdrawal charge. The $2,400 balance of the Account Year 8 Purchase Payment
will remain in your Account. If you make a subsequent $5,000 withdrawal in
Account Year 10, $2,400 of that amount will be withdrawn from the remainder of
the Account Year 8 Purchase Payment and will be subject to the withdrawal
charge. The other $2,600 of your withdrawal (which exceeds the amount of all New
Payments not previously withdrawn) will not be subject to the withdrawal charge.
CALCULATION OF WITHDRAWAL CHARGE
We calculate the amount of the withdrawal charge by multiplying the
Purchase Payments you withdraw by a percentage. The percentage varies according
to the number of Account Years the Purchase Payment has been held in your
Account, including the year in which you made the Payment, but not the year in
which you withdraw it. The applicable percentages are as follows:
<TABLE>
<CAPTION>
NUMBER OF
ACCOUNT YEARS PERCENTAGE
- -------------- ---------------
<S> <C>
0-1 6%
2-3 5%
4-5 4%
6 3%
7 or more 0%
</TABLE>
For example, again using the same facts as in the example above, the
percentage applicable to the withdrawals in Account Year 10 of Purchase Payments
made in Account Year 8 would be 5%, because the number of Account Years the
Purchase Payments have been held in your Account would be two.
For additional examples of how we calculate withdrawal charges, please see
Appendix C.
ALTERNATE WITHDRAWAL CHARGE
If you purchased your Contract before November 1994, or if your state does
not permit the withdrawal charge described above, we will impose the withdrawal
charge as follows:
FREE WITHDRAWAL AMOUNT
In each Account Year you may withdraw a portion of your Account Value
which we will call the "free withdrawal amount" before incurring the withdrawal
charge. For any year, the free withdrawal amount is equal to (1) 10% of the
amount of all Purchase Payments you have made during the last 7 Account Years,
including the current Account Year (the "Annual Withdrawal Allowance"), plus (2)
the amount of all Purchase Payments made before the last 7 Account Years that
you have not previously withdrawn. The Annual Withdrawal Allowance is not
cumulative; any portion of the Annual Withdrawal Allowance that you do not use
in an Account Year will not be carried forward or available for use in future
years.
For convenience, we refer to Purchase Payments made during the last 7
Account Years (including the current Account Year) as "New Payments," and all
Purchase Payments made before the last 7 Account Years as "Old Payments." Your
Account Value minus New Payments and Old Payments is called "accumulated value."
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ORDER OF WITHDRAWAL
When you make a withdrawal, we consider the oldest Payment that you have
not already withdrawn to be withdrawn first, then the next oldest, and so forth.
Once all Old Payments and New Payments are withdrawn, the balance withdrawn is
considered to be accumulated value.
CALCULATION OF WITHDRAWAL CHARGE
We calculate the amount of the withdrawal charge by multiplying the
Purchase Payments you withdraw by a percentage. The percentage varies according
to the number of Account Years the Purchase Payment has been held in your
Account, including the year in which you made the Payment, but not the year in
which you withdraw it. The applicable percentages are as follows:
<TABLE>
<CAPTION>
NUMBER OF
ACCOUNT YEARS PERCENTAGE
- -------------- ---------------
<S> <C>
0-1 6%
2-3 5%
4-5 4%
6 3%
7 or more 0%
</TABLE>
For additional examples of how we calculate the Alternate Withdrawal
Charge, please see Appendix C.
TYPES OF WITHDRAWALS NOT SUBJECT TO WITHDRAWAL CHARGE
We do not impose a withdrawal charge on withdrawals from the Accounts of
(a) our employees, (b) employees of our affiliates, or (c) licensed insurance
agents who sell the Contracts. We also may waive withdrawal charges with respect
to Purchase Payments derived from the surrender of other annuity contracts we
issue.
If approved in your state, we will waive the withdrawal charge for a full
withdrawal if (a) at least one year has passed since we issued your Contract and
(b) you are confined to an eligible nursing home and have been confined there
for at least the preceding 180 days, or any shorter period required by your
state. An "eligible nursing home" means a licensed hospital or licensed skilled
or intermediate care nursing facility at which medical treatment is available on
a daily basis and daily medical records are kept for each patient. You must
provide us evidence of confinement in the form we determine.
For each Qualified Contract, the free withdrawal amount in any Account
Year will be the greater of the free withdrawal amount described above and any
amounts required to be withdrawn to comply with the minimum distribution
requirement of the Internal Revenue Code. This applies only to the portion of
the required minimum distribution attributable to that Qualified Contract.
We do not impose the withdrawal charge on amounts you apply to provide an
annuity, amounts we pay as a death benefit, or amounts you transfer among the
Sub-Accounts, between the Sub-Accounts and the Fixed Account, or within the
Fixed Account.
MARKET VALUE ADJUSTMENT
We will apply a market value adjustment if you withdraw or transfer
amounts from your Fixed Account Value more than 30 days before the end of the
applicable Guarantee Period. For this purpose, using Fixed Account Value to
provide an annuity is considered a withdrawal, and the Market Value Adjustment
will apply. However, we will not apply the Market Value Adjustment to automatic
transfers to a Sub-Account from a Guarantee Period as part of our dollar cost
averaging program.
We apply the Market Value Adjustment separately to each Guarantee Amount
in the Fixed Account, that is to each separate allocation you have made to a
Guarantee Period together with interest credited on that allocation. However, we
do not apply the adjustment to the amount of interest credited during your
current Account Year. Any withdrawal from a Guarantee Amount is attributed first
to such interest.
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<PAGE>
A Market Value Adjustment may decrease, increase or have no effect on your
Account Value. This will depend on changes in interest rates since you made your
allocation to the Guarantee Period and the length of time remaining in the
Guarantee Period. In general, if the Guaranteed Interest Rate we currently
declare for Guarantee Periods equal to the balance of your Guarantee Period (or
your entire Guarantee Period for Guarantee Periods of less than one year) is
higher than your Guaranteed Interest Rate, the Market Value Adjustment is likely
to decrease your Account Value. If our current Guaranteed Interest Rate is
lower, the Market Value Adjustment is likely to increase your Account Value.
We determine the amount of the Market Value Adjustment by multiplying the
amount that is subject to the adjustment by the following formula:
<TABLE>
<S> <C>
N/12
1 + I
( -------- ) -1
1 + J
</TABLE>
where:
I is the Guaranteed Interest Rate applicable to the Guarantee Amount from
which you withdraw, transfer or annuitize;
J is the Guaranteed Interest Rate we declare at the time of your
withdrawal, transfer or annuitization for Guarantee Periods equal to the length
of time remaining in the Guarantee Period applicable to your Guarantee Amount,
rounded to the next higher number of complete years, for Guarantee Periods of
one year or more. For any Guarantee Periods of less than one year, J is the
Guaranteed Interest Rate we declare at the time of your withdrawal, transfer or
annuitization for a Guarantee Period of the same length as your Guarantee
Period. If, at that time, we do not offer the applicable Guarantee Period we
will use an interest rate determined by straight-line interpolation of the
Guaranteed Interest Rates for the Guarantee Periods we do offer; and
N is the number of complete months remaining in your Guarantee Period.
We will apply the Market Value Adjustment to the amount being withdrawn
after deduction of any Account Fee, if applicable, but before we impose any
withdrawal charge on the amount withdrawn.
For examples of how we calculate the Market Value Adjustment, see Appendix
C.
CONTRACT CHARGES
ACCOUNT FEE
Each year during the Accumulation Phase of your Contract we will deduct
from your Account an Account Fee to help cover the administrative expenses we
incur related to the issuance of Contracts and the maintenance of Accounts. We
deduct the Account Fee on each Account Anniversary, which is the anniversary of
the first day of the month after we issue your Contract. In Account Years 1
through 5, the Account Fee is equal to the lesser of (a) $30 and (b) 2% of your
Account Value. After Account Year 5, we may change the Account Fee each year,
but the Account Fee will never exceed the lesser of (a) $50 and (b) 2% of your
Account Value. We deduct the Account Fee pro rata from each Sub-Account and each
Guarantee Amount, based on the allocation of your Account Value on your Account
Anniversary.
We will not charge you the Account Fee if:
(1) your Account has been allocated only to the Fixed Account during the
applicable Account Year; or
(2) your Account Value is more than $75,000 on your Account Anniversary.
If you make a full withdrawal of your Account, we will deduct the full
amount of the Account Fee at the time of the withdrawal. In addition, on the
Annuity Commencement Date we will deduct a pro rata portion of the Account Fee
to reflect the time elapsed between the last Account Anniversary and the day
before the Annuity Commencement Date.
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<PAGE>
After the Annuity Commencement Date, we will deduct an annual Account Fee
of $30 in the aggregate in equal amounts from each Variable Annuity payment we
make during the year. We do not deduct any fee from Fixed Annuity payments.
ADMINISTRATIVE EXPENSE CHARGE
We deduct an administrative expense charge from the assets of the Variable
Account at an annual effective rate equal to 0.15% during both the Accumulation
Phase and the Income Phase. This charge is designed to reimburse expenses we
incur in administering the Contracts, the Accounts and the Variable Account that
are not covered by the Account Fee.
MORTALITY AND EXPENSE RISK CHARGE
We deduct a mortality and expense charge from the assets of the Variable
Account at an effective annual rate equal to 1.25% during both the Accumulation
Phase and the Income Phase. The mortality risk we assume arises from our
contractual obligation to continue to make annuity payments to each Annuitant,
regardless of how long the Annuitant lives and regardless of how long all
Annuitants as a group live. This obligation assures each Annuitant that neither
the longevity of fellow Annuitants nor an improvement in life expectancy
generally will have an adverse effect on the amount of any annuity payment
received under the contract. The expense risk we assume is the risk that the
Account Fee and administrative expense charge we assess under the Contracts may
be insufficient to cover the actual total administrative expenses we incur. If
the amount of the charge is insufficient to cover the mortality and expense
risks, we will bear the loss. If the amount of the charge is more than
sufficient to cover the risks, we will make a profit on the charge. We may use
this profit for any proper corporate purpose, including the payment of marketing
and distribution expenses for the Contracts.
PREMIUM TAXES
Some states and local jurisdictions impose a premium tax on us that is
equal to a specified percentage of the Purchase Payments you make. In many
states there is no premium tax. We believe that the amounts of applicable
premium taxes currently range from 0% to 3.5%. You should consult a tax adviser
to find out if your state imposes a premium tax and the amount of any tax.
In order to reimburse us for the premium tax we may pay on Purchase
Payments, our policy is to deduct the amount of such taxes from the amount you
apply to provide an annuity at the time of annuitization. However, we reserve
the right to deduct the amount of any applicable tax from your Account at any
time, including at the time you make a Purchase Payment or make a full or
partial withdrawal. We do not make any profit on the deductions we make to
reimburse premium taxes.
SERIES FUND EXPENSES
There are fees and charges deducted from each Series of the Series Fund.
These fees and expenses are described in the Series Fund's Prospectus and
Statement of Additional Information.
MODIFICATION IN THE CASE OF GROUP CONTRACTS
We may modify the Account Fee, the administrative expense charge and the
mortality and expense risk charge upon notice to Owners. However, such
modification will apply only with respect to Participant Accounts established
after the effective date of the modification.
DEATH BENEFIT
If the Annuitant dies during the Accumulation Phase, we will pay a death
benefit to your Beneficiary, using the payment method elected -- a single cash
payment or one of our Annuity Options. (If you have named more than one
Annuitant, the death benefit will be payable after the death of the last
surviving of the Annuitants.) If the Beneficiary is not living on the date of
death, we will pay the death benefit in one sum to you or to your estate. We do
not pay a death benefit if the
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<PAGE>
Annuitant dies during the Income Phase. However, the Beneficiary will receive
any payments provided under an Annuity Option that is in effect.
If you have a Non-Qualified Contract and your spouse is your Beneficiary,
upon your death (if you are the Annuitant) your spouse may elect to continue the
Contract as the Participant, rather than receive the death benefit. In that
case, the death benefit provisions of the Contract will not apply until the
death of your spouse. See "Other Contract Provisions -- Death of Participant."
AMOUNT OF DEATH BENEFIT
To calculate the amount of your death benefit, we use a "Death Benefit
Date." The Death Benefit Date is the date we receive proof of the Annuitant's
death in an acceptable form ("Due Proof of Death") if you have elected a death
benefit payment method before the Annuitant's death and it remains effective.
Otherwise, the Death Benefit Date is the later of the date we receive Due Proof
of Death or the date we receive either the Beneficiary's election of payment
method, or if the Beneficiary is your spouse, Contract continuation. If we do
not receive the Beneficiary's election within 60 days after we receive Due Proof
of Death, the Death Benefit Date will be the last day of the 60 day period.
The amount of the death benefit is determined as of the Death Benefit
Date.
If the Annuitant was 85 or younger on your Contract Date (the date we
accepted your first Purchase Payment), the death benefit will be the greatest of
the following amounts:
1. Your Account Value for the Valuation Period during which the Death
Benefit Date occurs;
2. The amount we would pay if you had surrendered your entire Account on
the Death Benefit Date;
3. Your Account Value on the Seven-Year Anniversary immediately before
the Death Benefit Date, adjusted for subsequent Purchase Payments and
partial withdrawals and charges made between the Seven-Year
Anniversary and the Death Benefit Date; and
4. Your total Purchase Payments minus the sum of partial withdrawals;
interest will accrue daily on each Purchase Payment and each partial
withdrawal at a rate equivalent to 5% per year until the first day of
the month following the Annuitant's 80th birthday, or until the
Purchase Payment or partial withdrawal has doubled in amount,
whichever is earlier.
If you were 86 or older on your Contract Date, the death benefit is equal
to amount (2) above; because this amount will reflect any applicable withdrawal
charges and market value adjustment, it may be less than your Account Value.
If the death benefit we pay is amount (2), (3), or (4), your Account Value
will be increased by the excess, if any, of that amount over amount (1). Any
such increase will be allocated to the Sub-Accounts in proportion to your
Account Value in those Sub-Accounts on the Death Benefit Date. Also, any portion
of this new Account Value attributed to the Fixed Account will be transferred to
the Money Market Series Sub-Account (without the application of a Market Value
Adjustment). The Beneficiary may then transfer to the Fixed Account and begin a
new Guarantee Period.
METHOD OF PAYING DEATH BENEFIT
The death benefit may be paid in a single cash payment or as an annuity
(either fixed, variable or a combination), under one or more of our Annuity
Options. We describe the Annuity Options in this Prospectus under "Income Phase
- -- Annuity Provisions."
During the Accumulation Phase, you may elect the method of payment for the
death benefit. If no such election is in effect on the date of the Annuitant's
death, the Beneficiary may elect either a single cash payment or an annuity.
With respect to a Non-Qualified Contract, if you were the Annuitant and the
Beneficiary is your spouse, the Beneficiary may elect to continue the
Non-Qualified Contract. These elections are made by sending us a completed
election form, which we will provide. If we do not receive the Beneficiary's
election within 60 days after we receive Due Proof of Death, we will pay the
death benefit in a single cash payment.
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<PAGE>
If we pay the death benefit in the form of an Annuity Option, the
Beneficiary becomes the Annuitant under the terms of that Annuity Option.
Neither you nor the Beneficiary may exercise rights that would adversely
affect the treatment of the Contract as an annuity contract under the Internal
Revenue Code. (See "Other Contract Provisions -- Death of Participant.")
SELECTION AND CHANGE OF BENEFICIARY
You select your Beneficiary in your Application. You may change your
Beneficiary at any time by sending us written notice on our required form,
unless you previously made an irrevocable Beneficiary designation. A new
Beneficiary designation is not effective until we record the change.
PAYMENT OF DEATH BENEFIT
Payment of the death benefit in cash will be made within 7 days of the
Death Benefit Date, except if we are permitted to defer payment in accordance
with the Investment Company Act of 1940. If an Annuity Option is elected, the
Annuity Commencement Date will be the first day of the second calendar month
following the Death Benefit Date, and your Account will remain in effect until
the Annuity Commencement Date.
DUE PROOF OF DEATH
We accept the following as proof of any person's death:
- an original certified copy of an official death certificate;
- an original certified copy of a decree of a court of competent
jurisdiction as to the finding of death; or
- any other proof we find satisfactory.
THE INCOME PHASE -- ANNUITY PROVISIONS
During the Income Phase, we make regular monthly payments to your
Annuitant.
The Income Phase of your Contract begins with the Annuity Commencement
Date. On that date, we apply your Account Value, adjusted as described below,
under the Annuity Option or Options you have selected, and we make the first
payment.
Once the Income Phase begins, no lump sum settlement option or cash
withdrawals are permitted, except pursuant to Annuity Option D, Monthly Payments
for a Specified Period Certain, as described below under the heading "Annuity
Options," and you cannot change the Annuity Option selected. You may request a
full withdrawal before the Annuity Commencement Date, which will be subject to
all charges applicable on withdrawals. See "Cash Withdrawals, Withdrawal Charge
and Market Value Adjustment."
SELECTION OF THE ANNUITANT OR CO-ANNUITANT
You select the Annuitant in your Application. The Annuitant is the person
who receives payments during the Income Phase and on whose life these payments
are based. In your Contract, the Annuity Options refer to the Annuitant as the
"Payee." If you name someone other than yourself as Annuitant and the Annuitant
dies before the Income Phase, you become the Annuitant.
In a Non-Qualified Contract, if you name someone other than yourself as
Annuitant, you may also select a Co-Annuitant, who will become the new Annuitant
if the original Annuitant dies before the Income Phase. If you have named both
an Annuitant and a Co-Annuitant, you may designate one of them to become the
sole Annuitant as of the Annuity Commencement Date, if both are living at that
time. If you have not made that designation on the 30th day before the Annuity
Commencement Date, and both the Annuitant and the Co-Annuitant are still living,
the Co-Annuitant will become the Annuitant.
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<PAGE>
When an Annuity Option has been selected as the method of paying the death
benefit, the Beneficiary is the Annuitant.
SELECTION OF THE ANNUITY COMMENCEMENT DATE
You select the Annuity Commencement Date in your Application. The
following restrictions apply to the date you may select:
- The earliest possible Annuity Commencement date is the first day of the
second month following your Contract Date.
- The latest possible Annuity Commencement Date is the first day of the
month following the Annuitant's 95th birthday or, if there is a
Co-Annuitant, the 95th birthday of the younger of the Annuitant and
Co-Annuitant.
- The Annuity Commencement Date must always be the first day of a month.
You may change the Annuity Commencement Date from time to time by sending
us written notice, with the following additional limitations:
- We must receive your notice at least 30 days before the current Annuity
Commencement Date.
- The new Annuity Commencement Date must be at least 30 days after we
receive the notice.
There may be other restrictions on your selection of the Annuity
Commencement Date imposed by your retirement plan or applicable law. In most
situations, current law requires that for a Qualified Contract, contain minimum
distributions must commence no later than April 1 following the year the
Annuitant reaches age 70 1/2 (or, for Qualified Contracts other than IRAs, no
later than April 1 following the year the Annuitant retires, if later than the
year the Annuitant reaches age 70 1/2).
ANNUITY OPTIONS
We offer the following Annuity Options for payments during the Income
Phase. Each Annuity Option may be selected for either a Variable Annuity, a
Fixed Annuity, or a combination of both, except that Option E is available only
for a Fixed Annuity. We may also agree to other settlement options, in our
discretion.
ANNUITY OPTION A -- LIFE ANNUITY
We provide monthly payments during the lifetime of the Annuitant. Annuity
payments stop when the Annuitant dies. There is no provision for continuation of
any payments to a Beneficiary.
ANNUITY OPTION B -- LIFE ANNUITY WITH 60, 120, 180 OR 240 MONTHLY PAYMENTS
CERTAIN
We make monthly payments during the lifetime of the Annuitant. In
addition, we guarantee that the Beneficiary will receive monthly payments for
the remainder of the period certain, if the Annuitant dies during that period.
The election of a longer period results in smaller monthly payments. If no
Beneficiary is designated, we pay the discounted value of the remaining payments
in one sum to the Annuitant's estate. The Beneficiary may also elect to receive
the discounted value of the remaining payments in one sum. The discount rate for
this purpose will be the assumed interest rate in effect; the discount rate for
a Fixed Annuity will be based on the interest rate we used to determine the
amount of each payment.
ANNUITY OPTION C -- JOINT AND SURVIVOR ANNUITY
We make monthly payments during the lifetime of the Annuitant and another
person you designate and during the lifetime of the survivor of the two. We stop
making payments when the last survivor dies. There is no provision for
continuance of any payments to a Beneficiary.
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*ANNUITY OPTION D -- MONTHLY PAYMENTS FOR A SPECIFIED PERIOD CERTAIN
We make monthly payments for a specified period of time from 5 to 30
years, as you elect. If payments under this option are paid on a variable
annuity basis, the Annuitant may elect to receive in one sum the discounted
value of the remaining payments, less any applicable withdrawal charge. The
discount rate for a Variable Annuity will be the assumed interest rate in
effect. If the Annuitant dies during the period selected, the remaining income
payments are made as described under Annuity Option B.
*ANNUITY OPTION E -- FIXED PAYMENTS
We hold the portion of your Adjusted Account Value selected for this
option at interest, and make fixed payments in such amounts and at such times as
you and we may agree. We continue making payments until the amount we hold is
exhausted. The final payment will be for the remaining balance and may be less
than the previous installments. We will credit interest yearly on the amount
remaining unpaid at a rate we determine from time to time, but never less than
3% per year (or a higher rate if specified in your Contract) compounded
annually. We may change the rate at any time, but will not reduce it more
frequently than once each calendar year.
SELECTION OF ANNUITY OPTION
You select one or more of the Annuity Options, which you may change from
time to time during the Accumulation Phase, as long as we receive your selection
or change in writing at least 30 days before the Annuity Commencement Date. If
we have not received your written selection on the 30th day before the Annuity
Commencement Date, you will receive Annuity Option B, for a life annuity with
120 monthly payments certain.
You may specify the proportion of your Adjusted Account Value you wish to
provide a Variable Annuity or a Fixed Annuity. Under a Variable Annuity, the
dollar amount of payments will vary, while under a Fixed Annuity, the dollar
amount of payments will remain the same. If you do not specify a Variable
Annuity or a Fixed Annuity, your Adjusted Account Value will be divided between
Variable Annuities and Fixed Annuities in the same proportions as your Account
Value was divided between the Variable and Fixed Accounts on the Annuity
Commencement Date. You may allocate your Adjusted Account Value applied to a
Variable Annuity among the Sub-Accounts, or we will use your existing
allocations.
There may be additional limitations on the options you may elect under
your particular retirement plan or applicable law.
REMEMBER THAT THE ANNUITY OPTIONS MAY NOT BE CHANGED ONCE ANNUITY PAYMENTS
BEGIN.
AMOUNT OF ANNUITY PAYMENTS
ADJUSTED ACCOUNT VALUE
The Adjusted Account Value is the amount we apply to provide a Variable
Annuity and/or a Fixed Annuity. We calculate Adjusted Account Value by taking
your Account Value on the Business Day just before the Annuity Commencement Date
and making the following adjustments:
- We deduct a proportional amount of the Account Fee, based on the
fraction of the current Account Year that has elapsed;
- If applicable, we apply the Market Value Adjustment to your Account
Value in the Fixed Account, which may result in a deduction, an
addition, or no change; and
- We deduct any applicable premium tax or similar tax if not previously
deducted.
- ------------------------
* The election of this Annuity Option may result in the imposition of a penalty
tax.
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VARIABLE ANNUITY PAYMENTS
Variable Annuity payments may vary each month. We determine the dollar
amount of the first payment using the portion of your Adjusted Account Value
applied to a Variable Annuity and the Annuity Payment Rates in your Contract,
which are based on an assumed interest rate of 3% per year, compounded annually.
See "Annuity Payment Rates."
To calculate the remaining payments, we convert the amount of the first
payment into Annuity Units for each Sub-Account; we determine the number of
those Annuity Units by dividing the portion of the first payment attributable to
the Sub-Account by the Annuity Unit Value of that Sub-Account for the Valuation
Period ending just before the Annuity Commencement Date. This number of Annuity
Units for each Sub-Account will remain constant (unless the Annuitant requests
an exchange of Annuity Units). However, the dollar amount of the next Variable
Annuity payment -- which is the sum of the number of Annuity Units for each
Sub-Account times its Annuity Unit Value for the Valuation Period ending just
before the date of the payment -- will increase, decrease, or remain the same,
depending on the net investment return of the Sub-Accounts.
If the net investment return of the Sub-Accounts selected is the same as
the assumed interest rate of 3%, compounded annually, the payments will remain
level. If the net investment return exceeds the assumed interest rate, payments
will increase and, conversely, if it is less than the assumed interest rate,
payments will decrease.
Please refer to the Statement of Additional Information for more
information about calculating Variable Annuity Units and Variable Annuity
payments, including examples of these calculations.
FIXED ANNUITY PAYMENTS
Fixed Annuity payments are the same each month. We determine the dollar
amount of each Fixed Annuity payment using the fixed portion of your Adjusted
Account Value and the applicable Annuity Payment Rates. These will be either (1)
the rates in your Contract, which are based on a minimum guaranteed interest
rate of 3% per year, compounded annually, or (2) new rates we have published and
are using on the Annuity Commencement Date, if they are more favorable. See
"Annuity Payment Rates."
MINIMUM PAYMENTS
If your Adjusted Account Value is less than $2,000, or the first annuity
payment for any Annuity Option is less than $20, we will pay the Adjusted
Account Value to the Annuitant in one payment.
EXCHANGE OF VARIABLE ANNUITY UNITS
During the Income Phase, the Annuitant may exchange Annuity Units from one
Sub-Account to another, up to 12 times each Account Year. To make an exchange,
the Annuitant sends us, at our Annuity Service Mailing Address, a written
request stating the number of Annuity Units in the Sub-Account he or she wishes
to exchange and the new Sub-Account for which Annuity Units are requested. The
number of new Annuity Units will be calculated so the dollar amount of an
annuity payment on the date of the exchange would not be affected. To calculate
this number, we use Annuity Unit values for the Valuation Period during which we
receive the exchange request.
We permit only exchanges among Sub-Accounts. No exchanges to or from a
Fixed Annuity are permitted.
ACCOUNT FEE
During the Income Phase, we deduct the annual Account Fee of $30 in equal
amounts from each Variable Annuity Payment. We do not deduct the Account Fee
from Fixed Annuity payments.
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ANNUITY PAYMENT RATES
The Contract contains Annuity Payment Rates for each Annuity Option
described in this Prospectus. The rates show, for each $1,000 applied, the
dollar amount of: (a) the first monthly Variable Annuity payment based on the
assumed interest rate specified in the applicable Contract (at least 3% per
year, compounded annually); and (b) the monthly Fixed Annuity payment, when this
payment is based on the minimum guaranteed interest rate specified in the
Contract (at least 3% per year, compounded annually). We may change these rates
under Group Contracts for Accounts established after the effective date of such
change (See "Other Contract Provisions -- Modification").
The Annuity Payment Rates may vary according to the Annuity Option elected
and the adjusted age of the Annuitant. The Contract also describes the method of
determining the adjusted age of the Annuitant. The mortality table used in
determining the Annuity Payment Rates for Options A, B and C is the 1983
Individual Annuitant Mortality Table.
ANNUITY OPTIONS AS METHOD OF PAYMENT FOR DEATH BENEFIT
You or your Beneficiary may also select one or more Annuity Options to be
used in the event of the Annuitant's death before the Income Phase, as described
under the "Death Benefit" section of this Prospectus. In that case, your
Beneficiary will be the Annuitant. The Annuity Commencement Date will be the
first day of the second month beginning after the Death Benefit Date.
OTHER CONTRACT PROVISIONS
EXERCISE OF CONTRACT RIGHTS
A Group Contract belongs to the Owner. In the case of a Group Contract,
the Owner may expressly reserve all Contract rights and privileges; otherwise,
each Participant will be entitled to exercise such rights and privileges. In any
case, such rights and privileges can be exercised without the consent of the
Beneficiary (other than an irrevocably designated Beneficiary) or any other
person. Such rights and privileges may be exercised only during the lifetime of
the Participant before the Annuity Commencement Date, except as the Contract
otherwise provides.
The Annuitant becomes the Payee on and after the Annuity Commencement
Date. The Beneficiary becomes the Payee on the death of the Participant prior to
the Annuity Commencement Date, or on the death of the Annuitant after the
Annuity Commencement Date. Such Payee may thereafter exercise such rights and
privileges, if any, of ownership which continue.
CHANGE OF OWNERSHIP
Ownership of a Qualified Contract may not be transferred except to: (1)
the Annuitant; (2) a trustee or successor trustee of a pension or profit sharing
trust which is qualified under Section 401 of the Internal Revenue Code; (3) the
employer of the Annuitant, provided that the Qualified Contract after transfer
is maintained under the terms of a retirement plan qualified under Section
403(a) of the Internal Revenue Code for the benefit of the Annuitant; (4) the
trustee or custodian of an individual retirement account plan qualified under
Section 408 of the Internal Revenue Code for the benefit of the Participants
under a Group Contract; or (5) as otherwise permitted from time to time by laws
and regulations governing the retirement or deferred compensation plans for
which a Qualified Contract may be issued. Subject to the foregoing, a Qualified
Contract may not be sold, assigned, transferred, discounted or pledged as
collateral for a loan or as security for the performance of an obligation or for
any other purpose to any person other than the Company.
The Owner of a Non-Qualified Contract may change the ownership of the
Contract prior to the last Annuity Commencement Date; and each Participant, in
like manner, may change the ownership interest in a Contract. A change of
ownership will not be binding on us until we receive written notification. When
we receive such notification, the change will be effective as of the date on
which the request for change was signed by the Owner or Participant, as
appropriate, but the change will be without prejudice to us on account of any
payment we make or any action we take before receiving the change. If you change
the Owner of a Non-Qualified Contract, you will become immediately liable for
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the payment of taxes on any gain realized under the Contract prior to the change
of ownership, including possible liability for a 10% federal excise tax.
DEATH OF PARTICIPANT
If your Contract is a Non-Qualified Contract and you die prior to the
Annuitant and before the Annuity Commencement Date, special distribution rules
apply. In that case, your Account Value, plus or minus any Market Value
Adjustment, must be distributed to your "designated beneficiary" within the
meaning of Section 72(s) of the Internal Revenue Code, either (1) as a lump sum
within 5 years after your death or (2) if in the form of an annuity, over a
period not greater than the life or expected life of the designated beneficiary,
with payments beginning no later than one year after your death.
The person you have named as Beneficiary under your Contract, if any, will
be the "designated beneficiary." If the named Beneficiary is not living, the
Annuitant automatically becomes the designated beneficiary.
If the designated beneficiary is your surviving spouse, your spouse may
elect to continue the Contract in his or her own name as Participant. If you
were the Annuitant as well as the Participant, your surviving spouse (if the
designated beneficiary) may elect to be named as both Participant and Annuitant
and continue the Contract; in that case, we will not pay a death benefit and the
Account Value will not be increased to reflect the death benefit calculation. In
all other cases where you are the Annuitant, the death benefit provisions of the
Contract control, subject to the condition that any Annuity Option elected
complies with the special distribution requirements described above.
If your spouse elects to continue the Contract (either in the case where
you are the Annuitant or in the case where you are not the Annuitant), your
spouse must give us written notification within 60 days after we receive Due
Proof of Death, and the special distributioon rules described above will apply
on the death of your spouse.
If you are the Annuitant and you die during the Income Phase, the
remaining value of the Annuity Option in place must be distributed at least as
rapidly as the method of distribution under the option.
If the Participant is not a natural person, these distribution rules apply
on a change in, or the death of, any Annuitant or Co-Annuitant.
Payments made in contravention of these special rules would adversely
affect the treatment of the Contracts as annuity contracts under the Internal
Revenue Code. Neither you nor the Beneficiary may exercise rights that would
have that effect.
If yours is a Qualified Contract, any distributions upon your death will
be subject to the laws and regulations governing the particular retirement or
deferred compensation plan in connection with which the Qualified Contract was
issued.
VOTING OF SERIES FUND SHARES
We will vote Series Fund shares held by the Sub-Accounts at meetings of
shareholders of the Series Fund or in connection with similar solicitations, but
will follow voting instructions received from persons having the right to give
voting instructions. During the Accumulation Phase, you will have the right to
give voting instructions, except where the Owner has reserved this right. During
the Income Phase, the Payee -- that is the Annuitant or Beneficiary entitled to
receive benefits -- is the person having such voting rights. We will vote any
shares attributable to us and Series Fund shares for which no timely voting
instructions are received in the same proportion as the shares for which we
receive instructions from Owners, Participants and Payees, as applicable.
Owners of Qualified Contracts issued on a group basis may be subject to
other voting provisions of the particular plan and of the Investment Company Act
of 1940. Employees who contribute to plans that are funded by the Contracts may
be entitled to instruct the Owners as to how to instruct us to vote the Series
Fund shares attributable to their contributions. Such plans may also provide the
additional extent, if any, to which the Owners shall follow voting instructions
of persons with rights under
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the plans. If no voting instructions are received from any such person with
respect to a particular Participant Account, the Owner may instruct the Company
as to how to vote the number of Series Fund shares for which instructions may be
given.
Neither the Variable Account nor the Company is under any duty to provide
information concerning the voting instruction rights of persons who may have
such rights under plans, other than rights afforded by the Investment Company
Act of 1940, or any duty to inquire as to the instructions received or the
authority of Owners, Participants or others, as applicable, to instruct the
voting of Series Fund shares. Except as the Variable Account or the Company has
actual knowledge to the contrary, the instructions given by Owners under Group
Contracts and Payees will be valid as they affect the Variable Account, the
Company and any others having voting instruction rights with respect to the
Variable Account.
All Series Fund proxy material, together with an appropriate form to be
used to give voting instructions, will be provided to each person having the
right to give voting instructions at least 10 days prior to each meeting of the
shareholders of the Series Fund. We will determine the number of Series Fund
shares as to which each such person is entitled to give instructions as of the
record date set by the Series Fund for such meeting, which is expected to be not
more than 90 days prior to each such meeting. Prior to the Annuity Commencement
Date, the number of Series Fund shares as to which voting instructions may be
given to the Company is determined by dividing the value of all of the Variable
Accumulation Units of the particular Sub-Account credited to the Participant
Account by the net asset value of one Series Fund share as of the same date. On
or after the Annuity Commencement Date, the number of Series Fund shares as to
which such instructions may be given by a Payee is determined by dividing the
reserve held by the Company in the Sub-Account with respect to the particular
Payee by the net asset value of a Series Fund share as of the same date. After
the Annuity Commencement Date, the number of Series Fund shares as to which a
Payee is entitled to give voting instructions will generally decrease due to the
decrease in the reserve.
PERIODIC REPORTS
During the Accumulation Period we will send you, or such other person
having voting rights, at least once during each Account Year, a statement
showing the number, type and value of Accumulation Units credited to your
Account and the Fixed Accumulation Value of your Account, which statement shall
be accurate as of a date not more than 2 months previous to the date of mailing.
These periodic statements contain important information concerning your
transactions with respect to a Contract. It is your obligation to review each
such statement carefully and to report to us, at the address or telephone number
provided on the statement, any errors or discrepancies in the information
presented therein within 60 days of the date of such statement. Unless we
receive notice of any such error or discrepancy from you within such period, we
may not be responsible for correcting the error or discrepancy.
In addition, every person having voting rights will receive such reports
or prospectuses concerning the Variable Account and the Series Fund as may be
required by the Investment Company Act of 1940 and the Securities Act of 1933.
We will also send such statements reflecting transactions in your Account as may
be required by applicable laws, rules and regulations.
Upon request, we will provide you with information regarding fixed and
variable accumulation values.
SUBSTITUTION OF SECURITIES
Shares of any or all Series of the Series Fund may not always be available
for investment under the Contract. We may add or delete Series or other
investment companies as variable investment options under the Contracts. We may
also substitute for the shares held in any Sub-Account shares of another Series
or shares of another registered open-end investment company or unit investment
trust, provided that the substitution has been approved , if required, by the
SEC. In the event of any substitution pursuant to this provision, we may make
appropriate endorsement to the Contract to reflect the substitution.
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CHANGE IN OPERATION OF VARIABLE ACCOUNT
At our election and subject to any necessary vote by persons having the
right to give instructions with respect to the voting of Series Fund shares held
by the Sub-Accounts, the Variable Account may be operated as a management
company under the Investment Company Act of 1940 or it may be deregistered under
the Investment Company Act of 1940 in the event registration is no longer
required. Deregistration of the Variable Account requires an order by the SEC.
In the event of any change in the operation of the Variable Account pursuant to
this provision, we may make appropriate endorsement to the Contract to reflect
the change and take such other action as may be necessary and appropriate to
effect the change.
SPLITTING UNITS
We reserve the right to split or combine the value of Variable
Accumulation Units, Annuity Units or any of them. In effecting any such change
of unit values, strict equity will be preserved and no change will have a
material effect on the benefits or other provisions of the Contract.
MODIFICATION
Upon notice to the Owner and Participant(s), (or the Payee(s) during the
Income Phase), we may modify the Contract if such modification: (i) is necessary
to make the Contract or the Variable Account comply with any law or regulation
issued by a governmental agency to which the Company or the Variable Account is
subject; (ii) is necessary to assure continued qualification of the Contract
under the Internal Revenue Code or other federal or state laws relating to
retirement annuities or annuity contracts; (iii) is necessary to reflect a
change in the operation of the Variable Account or the Sub-Account(s) (See
"Change in Operation of Variable Account"); (iv) provides additional Variable
Account and/or fixed accumulation options; or (v) as may otherwise be in the
best interests of Owners, Participants, or Payees, as applicable. In the event
of any such modification, we may make appropriate endorsement in the Contract to
reflect such modification.
In addition, upon notice to the Owner, we may modify a Group Contract to
change the withdrawal charges, Account Fees, mortality and expense risk charges,
administrative expense charges, the tables used in determining the amount of the
first monthly variable annuity and fixed annuity payments and the formula used
to calculate the Market Value Adjustment, provided that such modification
applies only to Participant Accounts established after the effective date of
such modification. In order to exercise our modification rights in these
particular instances, we must notify the Owner of such modification in writing.
The notice shall specify the effective date of such modification which must be
at least 60 days following the date we mail notice of modification. All of the
charges and the annuity tables which are provided in the Group Contract prior to
any such modification will remain in effect permanently, unless improved by the
Company, with respect to Participant Accounts established prior to the effective
date of such modification.
DISCONTINUANCE OF NEW PARTICIPANTS
We may limit or discontinue the acceptance of new Applications and the
issuance of new Certificates under a Group Contract by giving 30 days prior
written notice to the Owner. This will not affect rights or benefits with
respect to any Participant Accounts established under such Group Contract prior
to the effective date of such limitation or discontinuance.
RESERVATION OF RIGHTS
We reserve the right, to the extent permitted by law, to: (1) combine any
2 or more variable accounts; (2) add or delete Series, sub-series thereof or
other investment companies and corresponding Sub-Accounts; (3) add or remove
Guarantee Periods available at any time for election by a Participant; and (4)
restrict or eliminate any of the voting rights of Participants (or Owners) or
other persons who have voting rights as to the Variable Account. Where required
by law, we will obtain approval of changes from Participants or any appropriate
regulatory authority. In the event of any change pursuant to this provision, we
may make appropriate endorsement to the Contract to reflect the change.
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RIGHT TO RETURN
If you are not satisfied with your Contract, you may return it by mailing
or delivering it to us at the Annuity Service Mailing Address on the cover of
this Prospectus within 10 days after it was delivered to you. When we receive
the returned Contract, it will be cancelled and we will refund to you your
Account Value at the end of the Valuation Period during which we received it.
However, if applicable state law requires, we will return the full amount of any
Purchase Payment(s) we received. State law may also require us to give you a
longer "free look" period or allow you to return the Contract to your sales
representative.
If you are establishing an Individual Retirement Account ("IRA"), the
Internal Revenue Code requires that we give you a disclosure statement
containing certain information about the Contract and applicable legal
requirements. We must give you this statement on or before the date the IRA is
established. If we give you the disclosure statement before the seventh day
preceding the date the IRA is established, you will not have any right of
revocation under the Code. If we give you the disclosure statement at a later
date, then you may give us a notice of revocation at any time within 7 days
after your Contract Date. Upon such revocation, we will refund your Purchase
Payment(s). This right of revocation with respect to an IRA is in addition to
the return privilege set forth in the preceding paragraph. We allow a
Participant establishing an IRA a "ten day free-look," notwithstanding the
provisions of the Internal Revenue Code.
FEDERAL TAX STATUS
INTRODUCTION
This section describes general federal income tax consequences based upon
our understanding of current federal tax laws. Actual federal tax consequences
may vary depending on, among other things, the type of retirement plan with
which you use a Contract and whether (depending on the site of Contract
issuance) Puerto Rico tax law applies. Also, Congress has the power to enact
legislation affecting the tax treatment of annuity contracts, and such
legislation could apply retroactively to Contracts that you purchased before the
date of enactment. We do not make any guarantee regarding the federal, state, or
local tax status of any Contract or any transaction involving any Contract. You
should consult a qualified tax professional for advice before purchasing a
Contract or executing any other transaction (such as a rollover, distribution,
withdrawal or payment) involving a Contract.
DEDUCTIBILITY OF PURCHASE PAYMENTS
For federal income tax purposes, Purchase Payments made under
Non-Qualified Contracts are not deductible.
PRE-DISTRIBUTION TAXATION OF CONTRACTS
Generally, an increase in the value of a Contract will not give rise to
tax, prior to distribution.
However, corporate (or other non-natural person) Owners of, and
Participants under, a Non-Qualified Contract incur current tax, regardless of
distribution, on Contract value increases. Such current taxation does not apply,
though, to (i) immediate annuities, which the Internal Revenue Code (the "Code")
defines as a single premium contract with an annuity commencement date within
one year of the date of purchase, or (ii) any Contract that the non-natural
person holds as agent for a natural person (such as where a bank or other entity
holds a Contract as trustee under a trust agreement).
The Internal Revenue Service could assert that Owners or Participants
under both Qualified Contracts and Non-Qualified Contracts annually receive a
taxable deemed distribution equal to the cost of any life insurance benefit
under the Contract.
You should note that qualified retirement investments automatically
provide tax deferral regardless of whether the underlying contract is an
annuity.
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DISTRIBUTIONS AND WITHDRAWALS FROM NON-QUALIFIED CONTRACTS
The Account Value will include an amount attributable to Purchase
Payments, the return of which is not taxable, and an amount attributable to
investment earnings, the return of which is taxable at ordinary income rates.
The relative portions of a distribution that derive from nontaxable Purchase
Payments and taxable investment earnings depend upon the timing of the
distribution.
If you withdraw less than your entire Account Value under a Non-Qualified
Contract before the Annuity Commencement Date, you must treat the withdrawal
first as a return of investment earnings. You may treat only withdrawals in
excess of the amount of the Account Value attributable to investment earnings as
a return of Purchase Payments. Account Value amounts assigned or pledged as
collateral for a loan will be treated as if withdrawn from the Contract.
If a Payee receives annuity payments under a Non-Qualified Contract after
the Annuity Commencement Date, however, the Payee treats a portion of each
payment as a nontaxable return of Purchase Payments. In general, the nontaxable
portion of such a payment bears the same ratio to the total payment as the
Purchase Payments bear to the Payee's expected return under the Contract. The
remainder of the payment constitutes a taxable return of investment earnings.
Once the Payee has received nontaxable payments in an amount equal to total
Purchase Payments, all future distributions constitute fully taxable ordinary
income. If the Annuitant dies before the Payee recovers the full amount of
Purchase Payments, the Payee may deduct an amount equal to unrecovered Purchase
Payments.
Upon the transfer of a Non-Qualified Contract by gift (other than to the
Participant's spouse), the Participant must treat an amount equal to the Account
Value minus the total amount paid for the Contract as income.
A penalty tax of 10% may apply to taxable cash withdrawals and lump-sum
payments from Non-Qualified Contracts. This penalty will not apply in certain
circumstances, such as distributions pursuant to the death of the Participant or
distributions under an immediate annuity (as defined above), or after age
59 1/2.
DISTRIBUTIONS AND WITHDRAWALS FROM QUALIFIED CONTRACTS
Generally, distributions from a Qualified Contract will constitute fully
taxable ordinary income. Also, a 10% penalty tax will, except in certain
circumstances, apply to distributions prior to age 59 1/2.
Distributions from a Qualified Contract are not subject to current
taxation or a 10% penalty, however, if:
- the distribution is not a hardship distribution or part of a series of
payments for life or for a specified period of 10 years or more (an
"eligible rollover distribution"), and
- the Participant or Payee rolls over the distribution (with or without
actually receiving the distribution) into a qualified retirement plan
eligible to receive the rollover.
Only you or your spouse may elect to roll over a distribution to an
eligible retirement plan.
WITHHOLDING
In the case of an eligible rollover distribution (as defined above) from a
Qualified Contract (other than from a Contract issued for use with an individual
retirement account), we (or the plan administrator) must withhold and remit to
the U.S. Government 20% of the distribution, unless the Participant or Payee
elects to make a direct rollover of the distribution to another qualified
retirement plan that is eligible to receive the rollover; however, only you or
your spouse may elect a direct rollover. In the case of a distribution from (i)
a Non-Qualified Contract, (ii) a Qualified Contract issued for use with an
individual retirement account, or (iii) a Qualified Contract where the
distribution is not an eligible rollover distribution, we will withhold and
remit to the U.S. Government a part of the taxable portion of each distribution
unless, prior to the distribution, the Participant or Payee provides
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us his or her taxpayer identification number and instructs us (in the manner
prescribed) not to withhold. The Participant or Payee may credit against his or
her federal income tax liability for the year of distribution any amounts that
we (or the plan administrator) withhold.
PURCHASE OF IMMEDIATE ANNUITY CONTRACT AND DEFERRED ANNUITY CONTRACT
You should consider the following information only if you intend to
purchase an immediate annuity contract and a deferred annuity contract together.
We understand that the Treasury Department might reconsider the tax treatment of
annuity payments under an immediate annuity contract (as defined above)
purchased together with a deferred annuity contract. We believe that any adverse
change in the existing tax treatment of such immediate annuity contracts would
not apply to contracts issued before the Treasury Department announces the
change. However, there can be no assurance that the Treasury Department will not
apply any such change retroactively.
INVESTMENT DIVERSIFICATION AND CONTROL
The Treasury Department has issued regulations that prescribe investment
diversification requirements for mutual fund series underlying nonqualified
variable contracts. Contracts must comply with these regulations to qualify as
annuities for federal income tax purposes. Contracts that do not meet the
guidelines are subject to current taxation on annual increases in value. We
believe that each series of the Series Fund complies with these regulations. The
preamble to the regulations states that the Internal Revenue Service may
promulgate guidelines under which an owner's excessive control over investments
underlying the contract will preclude the contract from qualifying as an annuity
for federal tax purposes. We cannot predict whether such guidelines, if in fact
promulgated, will be retroactive. We will take any action (including
modification of the Contract and/or the Variable Account) necessary to comply
with any retroactive guidelines.
TAX TREATMENT OF THE COMPANY AND THE VARIABLE ACCOUNT
As a life insurance company under the Code, we will record and report
operations of the Variable Account separately from other operations. The
Variable Account will not, however, constitute a regulated investment company or
any other type of taxable entity distinct from our other operations. We will not
incur tax on the income of the Variable Account (consisting primarily of
interest, dividends, and net capital gains) if we use this income to increase
reserves under Contracts participating in the Variable Account.
QUALIFIED RETIREMENT PLANS
You may use Qualified Contracts with several types of qualified retirement
plans. Because tax consequences will vary with the type of qualified retirement
plan and the plan's specific terms and conditions, we provide below only brief,
general descriptions of the consequences that follow from using Qualified
Contracts in connection with various types of qualified retirement plans. We
stress that the rights of any person to any benefits under these plans may be
subject to the terms and conditions of the plans themselves, regardless of the
terms of the Qualified Contracts that you are using. These terms and conditions
may include restrictions on, among other things, ownership, transferability,
assignability, contributions and distributions. Owners, Participants, Payees,
Beneficiaries and administrators of qualified retirement plans should consider,
with the guidance of a tax adviser, whether the death benefit payable under the
Contract affects the qualified status of their retirement plan.
PENSION AND PROFIT-SHARING PLANS
Sections 401(a), 401(k) and 403(a) of the Code permit business employers
and certain associations to establish various types of retirement plans for
employees. The Tax Equity and Fiscal Responsibility Act of 1982 eliminated most
differences between qualified retirement plans of corporations and those of
self-employed individuals. Self-employed persons may therefore use Qualified
Contracts as a funding vehicle for their retirement plans, as a general rule.
34
<PAGE>
TAX-SHELTERED ANNUITIES
Section 403(b) of the Code permits public school employees and employees
of certain types of charitable, educational and scientific organizations
specified in Section 501(c)(3) of the Code to purchase annuity contracts and,
subject to certain limitations, exclude the amount of purchase payments from
gross income for tax purposes. The Code imposes restrictions on cash withdrawals
from Section 403(b) annuities.
If the Contracts are to receive tax deferred treatment, cash withdrawals
of amounts attributable to salary reduction contributions (other than
withdrawals of accumulation account value as of December 31, 1988) may be made
only when the Participant attains age 59 1/2, separates from service with the
employer, dies or becomes disabled (within the meaning of Section 72(m)(7) of
the Code). These restrictions apply to (i) any post-1988 salary reduction
contributions, (ii) any growth or interest on post-1988 salary reduction
contributions, and (iii) any growth or interest on pre-1989 salary reduction
contributions that occurs on or after January 1, 1989. It is permissible,
however, to withdraw post-1988 salary reduction contributions in cases of
financial hardship. While the Internal Revenue Service has not issued specific
rules defining financial hardship, we expect that to qualify for a hardship
distribution, the Participant must have an immediate and heavy bona fide
financial need and lack other resources reasonably available to satisfy the
need. Hardship withdrawals (as well as certain other premature withdrawals) will
be subject to a 10% tax penalty, in addition to any withdrawal charge applicable
under the Contracts. Under certain circumstances the 10% tax penalty will not
apply if the withdrawal is for medical expenses.
Under the terms of a particular Section 403(b) plan, the Participant may
be entitled to transfer all or a portion of the Account Value to one or more
alternative funding options. Participants should consult the documents governing
their plan and the person who administers the plan for information as to such
investment alternatives.
INDIVIDUAL RETIREMENT ACCOUNTS
Sections 219 and 408 of the Code permit eligible individuals to contribute
to an individual retirement program, including Simplified Employee Pension
Plans, Employer/Association of Employees Established Individual Retirement
Account Trusts, and Simple Retirement Accounts. Such IRAs are subject to
limitations on contribution levels, the persons who may be eligible, and on the
time when distributions may commence. In addition, certain distributions from
some other types of retirement plans may be placed in an IRA on a tax-deferred
basis. If we sell Contracts for use with IRAs, the Internal Revenue Service or
other agency may impose supplementary information requirements. We will provide
purchasers of the Contracts for such purposes with any necessary information.
You will have the right to revoke the Contract under certain circumstances, as
described in the section of this Prospectus entitled "Right to Return."
ROTH IRAS
Section 408A of the Code permits an individual to contribute to an
individual retirement program called a Roth IRA. Unlike contributions to a
traditional IRA under Section 408 of the Code, contributions to a Roth IRA are
not tax-deductible. Provided certain conditions are satisfied, distributions are
generally tax-free. Like traditional IRAs, Roth IRAs are subject to limitations
on contribution amounts and the timing of distributions. If an individual
converts a traditional IRA into a Roth IRA the full amount of the IRA is
included in taxable income. The Internal Revenue Service and other agencies may
impose special information requirements with respect to Roth IRAs. If and when
we make Contracts available for use with Roth IRAs, we will provide any
necessary information.
ADMINISTRATION OF THE CONTRACTS
We perform certain administrative functions relating to the Contracts,
Participant Accounts, and the Variable Account. These functions include, but are
not limited to, maintaining the books and records of the Variable Account and
the Sub-Accounts; maintaining records of the name, address, taxpayer
identification number, Contract number, Participant Account number and type, the
status of
35
<PAGE>
each Participant Account and other pertinent information necessary to the
administration and operation of the Contracts; processing Applications, Purchase
Payments, transfers and full and partial withdrawals; issuing Contracts and
Certificates; administering annuity payments; furnishing accounting and
valuation services; reconciling and depositing cash receipts; providing
confirmations; providing toll-free customer service lines; and furnishing
telephonic transfer services.
DISTRIBUTION OF THE CONTRACTS
We offer the Contracts on a continuous basis. The Contracts are sold by
licensed insurance agents in those states where the Contracts may be lawfully
sold. Such agents will be registered representatives of broker-dealers
registered under the Securities Exchange Act of 1934 who are members of the
National Association of Securities Dealers, Inc. and who have entered into
distribution agreements with the Company and the general distributor, Clarendon
Insurance Agency, Inc. ("Clarendon"), One Sun Life Executive Park, Wellesley
Hills, Massachusetts 02481. Clarendon, a wholly-owned subsidiary of the Company,
is registered with the SEC under the Securities Exchange Act of 1934 as a
broker-dealer and is a member of the National Association of Securities Dealers,
Inc.
Commissions and other distribution compensation will be paid by the
Company to the selling agents and will not be more than 7.34% of Purchase
Payments. In addition, after the first Account Year, broker-dealers who have
entered into distribution agreements with the Company may receive an annual
renewal commission of no more than 1.00% of the Participant's Account Value. In
addition to commissions, the Company may, from time to time, pay or allow
additional promotional incentives, in the form of cash or other compensation. We
reserve the right to offer these additional incentives only to certain
broker-dealers that sell or are expected to sell during specified time periods
certain minimum amounts of the Contracts or Certificates or other contracts
offered by the Company. Promotional incentives may change at any time.
Commissions will not be paid with respect to Accounts established for the
personal account of employees of the Company or any of its affiliates, or of
persons engaged in the distribution of the Contracts, or of immediate family
members of such employees or persons. In addition, commissions may be waived or
reduced in connection with certain transactions described in this Prospectus
under the heading "Waivers; Reduced Charges; Credits; Bonus Guaranteed Interest
Rates." During 1996, 1997 and 1998, approximately $18,652,927, $16,576,365, and
$12,076,614, respectively, was paid to and retained by Clarendon in connection
with distribution of the Contracts.
PERFORMANCE INFORMATION
From time to time the Variable Account may publish reports to
shareholders, sales literature and advertisements containing performance
information relating to the Sub-Accounts. This information may include
standardized and non-standardized "Average Annual Total Return," "Cumulative
Growth Rate" and "Compound Growth Rate." The Government Securities Series
Sub-Account and the High Yield Series Sub-Account may also advertise "yield."
The Money Market Series Sub-Account may advertise "yield" and "effective yield."
Average Annual Total Return measures the net income of the Sub-Account and
any realized or unrealized gains or losses of the Series in which it invests,
over the period stated. Average Annual Total Return figures are annualized and
represent the average annual percentage change in the value of an investment in
a Sub-Account over that period. Standardized Average Annual Total Return
information covers the period after the Variable Account was estabilished or, if
shorter, the life of the Series. Non-standardized Average Annual Return covers
the life of each Series, which may predate the Variable Account. Cumulative
Growth Rate represents the cumulative change in the value of an investment in
the Sub-Account for the period stated, and is arrived at by calculating the
change in the Accumulation Unit Value of a Sub-Account between the first and the
last day of the period being measured. The difference is expressed as a
percentage of the Accumulation Unit Value at the beginning of the base period.
"Compound Growth Rate" is an annualized measure, calculated by applying a
formula that determines the level of return which, if earned over the entire
period, would produce the cumulative return.
36
<PAGE>
Average Annual Total Return figures assume an initial purchase payment of
$1,000 and reflect all applicable withdrawal and Contract charges. The
Cumulative Growth Rate and Compound Growth Rate figures that we advertise do not
reflect withdrawal charges or the Account Fee, although they reflect all
recurring charges. Results calculated without withdrawal and/or certain Contract
charges will be higher. We may also use other types of rates of return that do
not reflect withdrawal and Contract charges.
The performance figures used by the Variable Account are based on the
actual historical performance of the Series Fund for the specified periods, and
the figures are not intended to indicate future performance. For periods before
the date the Contracts became available, we calculate the performance
information for the Sub-Account on a hypothetical basis. To do this, we reflect
deductions of the current Contract fees and charges from the historical
performance of the corresponding series.
Yield is a measure of the net dividend and interest income earned over a
specific one month or 30-day period (7-day period for the Money Market Series
Sub-Account), expressed as a percentage of the value of the Sub-Account's
Accumulation Units. Yield is an annualized figure, which means that we assume
that the Sub-Account generates the same level of net income over a one-year
period and compound that income on a semi-annual basis. We calculate the
effective yield for the Money Market Series Sub-Account similarly, but include
the increase due to assumed compounding. The Money Market Sub-Account's
effective yield will be slightly higher than its yield as a result of its
compounding effect.
The Variable Account may also from time to time compare its investment
performance to various unmanaged indices or other variable annuities and may
refer to certain rating and other organizations in its marketing materials. More
information on performance and our computations is set forth in the Statement of
Additional Information.
The Company may also advertise the ratings and other information assigned
to it by independent industry ratings organizations. Some of these organizations
are A.M. Best, Moody's Investor's Service, Standard and Poor's Insurance Rating
Services, and Duff and Phelps. Each year A.M. Best reviews the financial status
of thousands of insurers, culminating in the assignment of Best's rating. These
ratings reflect A.M. Best's current opinion of the relevant financial strength
and operating performance of an insurance company in comparison to the norms of
the life/health industry. Best's ratings range from A++ to F. Standard and
Poor's and Duff and Phelps' ratings measure the ability of an insurance company
to meet its obligations under insurance policies it issues. These two ratings do
not measure the insurance company's ability to meet non-policy obligations.
Ratings in general do not relate to the performance of the Sub-Accounts.
We may also advertise endorsements from organizations, individuals or
other parties that recommend the Company or the Contracts. We may occasionally
include in advertisements (1) comparisons of currently taxable and tax deferred
investment programs, based on selected tax brackets; or (2) discussions of
alternative investment vehicles and general economic conditions.
AVAILABLE INFORMATION
The Company and the Variable Account have filed with the SEC registration
statements under the Securities Act of 1933 relating to the Contracts. This
Prospectus does not contain all of the information contained in the registration
statements and their exhibits. For further information regarding the Variable
Account, the Company and the Contracts, please refer to the registration
statements and their exhibits.
In addition, the Company is subject to the informational requirements of
the Securities Exchange Act of 1934. We file reports and other information with
the SEC to meet these requirements. You can inspect and copy this information
and our registration statements at the SEC's public reference facilities at the
following locations: WASHINGTON, D.C. -- 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549; CHICAGO, ILLINOIS -- 500 West Madison Street, Chicago,
IL 60661; NEW YORK, NEW YORK -- 7 World Trade Center, 13th Floor, New York, NY
10048. The Washington, D.C. office will
37
<PAGE>
also provide copies by mail for a fee. You may also find these materials on the
SEC's website (http:// www.sec.gov).
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Company's Annual Report on Form 10-K for the year ended December 31,
1998 filed with the SEC is incorporated by reference in this Prospectus. Any
statement contained in a document we incorporate by reference is deemed modified
or superceded to the extent that a later filed document, including this
Prospectus, shall modify or supercede that statement. Any statement so modified
or superceded shall not be deemed, except as so modified or superceded, to
constitute part of this Prospectus.
The Company will furnish, without charge, to each person to whom a copy of
this Prospectus is delivered, upon the written or oral request of such person, a
copy of the document referred to above which has been incorporated by reference
in this Prospectus, other than exhibits to such document (unless such exhibits
are specifically incorporated by reference in this Prospectus). Requests for
such document should be directed to the Secretary, Sun Life Assurance Company of
Canada (U.S.), One Sun Life Executive Park, Wellesley Hills, Massachusetts
02481, telephone (800) 225-3950.
ADDITIONAL INFORMATION ABOUT THE COMPANY
BUSINESS OF THE COMPANY
We are engaged in the sale of individual variable life insurance and
individual and group fixed and variable annuities. These contracts are sold in
both the tax qualified and non-tax qualified markets. These products are
distributed through individual insurance agents, insurance brokers and
registered broker-dealers.
The following table sets forth premiums and deposits by major product
categories for each of the last three years. See notes to financial statements
for industry segment information.
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Individual insurance products $ 155,907 $ 204,671 $ 207,845
Retirement products $ 2,194,895 $ 2,204,693 $ 1,834,327
------------ ------------ ------------
$ 2,350,802 $ 2,409,364 $ 2,042,172
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
We have obtained authorization to do business in 48 states, the District
of Columbia and Puerto Rico, and anticipate that we will be authorized to do
business in all states except New York. We have formed a wholly-owned
subsidiary, Sun Life Insurance and Annuity Company of New York, which issues
individual fixed and combination fixed/variable annuity contracts and group life
and long-term disability insurance in New York. Our other active subsidiaries
are Sun Capital Advisers, Inc., a registered investment adviser, Clarendon
Insurance Agency, Inc., a registered broker-dealer that acts as the general
distributor of the Contracts and other annuity and life insurance contracts that
we and our affiliates issue, Sun Life of Canada (U.S.) Distributors, Inc., a
registered broker-dealer and investment adviser, New London Trust, F.S.B., a
federally chartered savings bank, Sun Life Financial Services Limited, which
provides off-shore administrative services to us and our parent, Sun Life
Assurance Company of Canada ("Sun Life (Canada)"), and Sun Life Information
Services Ireland Limited, an offshore technology center.
We are a wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings,
Inc. ("Life Holdco"). Life Holdco is a wholly-owned subsidiary of Sun Life
Assurance Company of Canada -- U.S. Operations Holdings, Inc. ("U.S. Holdco").
U.S. Holdco is a wholly-owned subsidiary of Sun Life (Canada), 150 King Street
West, Toronto, Ontario, Canada. Sun Life (Canada) is a mutual life insurance
company incorporated pursuant to Act of Parliament of Canada in 1865 and
currently transacts business in all of the Canadian provinces and territories,
in all U.S. states (except New York), and in the District of
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<PAGE>
Columbia, Puerto Rico, the Virgin Islands, Great Britain, Ireland, Hong Kong,
Bermuda and the Philippines.
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
---------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------
(IN $ THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenues
Premiums, annuity deposits and other revenue $ 2,581,463 $ 2,623,629 $ 2,215,322 $ 1,883,901 $ 1,997,525
Net investment income and realized gains 187,208 298,121 310,172 315,966 312,583
----------- ----------- ----------- ----------- -----------
2,768,671 2,921,750 2,525,494 2,199,867 2,310,108
----------- ----------- ----------- ----------- -----------
Benefits and expenses
Policyholder benefits 2,416,950 2,579,104 2,232,528 1,995,208 2,102,290
Other expenses 214,607 206,065 175,342 150,937 186,892
----------- ----------- ----------- ----------- -----------
2,631,557 2,785,169 2,407,870 2,146,145 2,289,182
----------- ----------- ----------- ----------- -----------
Operating gain 137,114 136,581 117,624 53,722 20,926
Federal income tax expense (benefit) 11,713 7,339 (5,400) 17,807 19,469
----------- ----------- ----------- ----------- -----------
Net income $ 125,401 $ 129,242 $ 123,024 $ 35,915 $ 1,457
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Assets $16,902,621 $15,925,357 $13,621,952 $12,359,683 $10,117,822
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Surplus notes $ 565,000 $ 565,000 $ 315,000 $ 650,000 $ 335,000
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
</TABLE>
See Note 1 to financial statements for changes in accounting principles and
reporting.
See discussion in Management's Discussion and Analysis of Financial Condition
and Results of Operations.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
CAUTIONARY STATEMENT
This Prospectus includes forward looking statements by the Company under
the Private Securities Litigation Reform Act of 1995. These statements are not
matters of historical fact; they relate to such topics as future product sales,
Year 2000 compliance, volume growth, market share, market risk and financial
goals. It is important to understand that these forward-looking statements are
subject to certain risks and uncertainties that could cause actual results to
differ materially from those that the statements anticipate. These risks and
uncertainties may concern, among other things:
- - The Company's ability to identify and address Year 2000 issues successfully,
in a timely manner, and at reasonable cost. They also may concern the ability
of the Company's vendors, suppliers, other service providers, and customers to
successfully address their own Year 2000 issues in a timely manner.
- - Heightened competition, particularly in terms of price, product features, and
distribution capability, which could constrain the Company's growth and
profitability.
- - Changes in interest rates and market conditions.
- - Regulatory and legislative developments.
- - Developments in consumer preferences and behavior patterns.
39
<PAGE>
RESULTS OF OPERATIONS
NET INCOME
Net income decreased by $3.8 million to $125.4 million in 1998, reflecting
an increase of $22.5 million in income from operations and a decrease of $26.3
million in net realized capital gains. (In the following discussion, "income
from operations" refers to the statutory statement of operations line item, net
gain from operations after dividends to policyholders and federal income tax and
before realized capital gains.)
Income from operations increased from $102.5 million in 1997 to $125.0
million in 1998, mainly as a result of the following factors:
- - A $16.7 million increase, to $31.4 million in 1998, in the income from
operations from the Company's Retirement Products and Services segment. (This
is discussed in the "Retirement Products and Services Segment" section below.)
- - The effect of terminating certain reinsurance agreements with the Company's
ultimate parent. The termination of these agreements was the predominant
factor in the $71.1 million increase in income from operations for the
Company's Individual Insurance segment.
- - The effects of the Company's December 1997 reorganization (described in the
"Corporate & Other Segment" section below), as a result of which MFS was no
longer a subsidiary of the Company. As a result of this reorganization,
dividends from subsidiaries were lower in 1998 than in 1997 and certain
subsidiary tax benefits were no longer available to the Company. Also
affecting income from operations for the Corporate segment in 1998 was that
income earned on the proceeds of a December 1997 issuance of a $250 million
surplus note was lower than the related interest expense.
Net realized capital gains decreased from $26.7 million in 1997 to $0.4
million in 1998. This change also reflected the Company's reorganization, as a
result of which the Company had a realized capital gain of $21.2 million in
1997.
Net income increased by $6.2 million to $129.2 million in 1997, as
compared to 1996 reflecting a decrease of $15.6 million in income from
operations and an increase of $21.8 million in net realized capital gains.
Income from operations decreased from $118.2 million in 1996 to $102.5
million in 1997, mainly as a result of the following factors:
- - A $7.6 million decrease, to $14.7 million, in income from operations from the
Company's Retirement Products and Services segment. (This is discussed in the
"Retirement Products and Services Segment" section below.)
- - An increase of $6.5 million, compared to 1996, in the effects of the
reinsurance arrangements between the Company and its ultimate parent.
- - A decrease, by approximately $9 million, in dividends from subsidiaries, as
well as higher taxes and expenses in the Corporate segment.
As noted above, the $21.9 million increase in net realized capital gains,
from $4.8 million in 1996 to $26.7 million in 1997, was caused mainly by the
December 1997 company reorganization, as a result of which the Company had a
realized capital gain of $21.2 million in 1997.
INCOME FROM OPERATIONS BY SEGMENT
The Company's income from operations reflects the operations of its three
business segments: the Retirement Products and Services segment, the Individual
Insurance segment and the Corporate segment. The following table provides a
summary.
40
<PAGE>
INCOME FROM OPERATIONS BY SEGMENT*
($ IN MILLIONS)
<TABLE>
<CAPTION>
% CHANGE
----------------------------
1998 1997 1996 1998/1997 1997/1996
--------- --------- --------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Individual Insurance 89.1 18.0 11.5 395.0% 56.5%
Retirement Products and Services 31.4 14.7 22.3 113.6% (34.1)%
Corporate 4.5 69.8 84.4 (93.6)% (17.3)%
--------- --------- --------- ----- -----
125.0 102.5 118.2 22.0% (13.3)%
--------- --------- --------- ----- -----
--------- --------- --------- ----- -----
</TABLE>
*Before realized capital gains
These results are discussed more fully below.
RETIREMENT PRODUCTS AND SERVICES SEGMENT
The Retirement Products and Services segment focuses on the savings and
retirement needs of those preparing for retirement or those who have already
retired. It primarily markets to upscale consumers in the U.S., selling
individual and group fixed and variable annuities. Its major product lines,
"Regatta" and "Futurity," are combination fixed/variable annuities. In these
combination annuities, contract holders have the choice of allocating payments
either to a fixed account, which provides a guaranteed rate of return, or to
variable accounts. Withdrawals from the fixed account are subject to market
value adjustment. In the variable accounts, the contract holder can choose from
a range of investment options and styles. The return depends upon investment
performance of the options selected. Investment funds available under Regatta
are managed by MFS, an affiliate of the Company. Investment funds available
under Futurity products are managed by several investment managers, including
MFS and Sun Capital Advisers, Inc., a subsidiary of the Company.
The Company distributes these annuity products through a variety of
channels. For the Regatta products, about half are sold through securities
brokers; a further one-fourth through financial institutions, and the remainder
through insurance agents and financial planners. The Futurity products,
introduced in February 1998, are distributed through a dedicated wholesaler
network, including Sun Life of Canada (US) Distributors, Inc., that services
similar distribution channels.
Although new pension products are not currently sold, there has been a
substantial block of group retirement business in-force, including guaranteed
investment contracts ("GICs"), pension plans and group annuities. A significant
portion of these pension contracts are non-surrenderable, with the result that
the Company's liquidity exposure is limited. GICs were marketed directly in the
U.S. through independent managers. In 1997, the Company decided to no longer
market group pension and GIC products.
Following are the major factors affecting the Retirement Products and
Services segment results compared to the prior year.
1998 COMPARED TO 1997:
- - A SHIFTING PATTERN IN SALES. Annuity deposits declined by about $27 million,
or 1%, to $2.2 billion in 1998. Fixed annuity account deposits were lower by
approximately 7% in 1998, while deposits into variable annuity accounts have
been increasing in total and as a proportion of total annuity deposits. These
trends reflected market conditions and competitive factors.
Deposits into the Dollar Cost Averaging (DCA) programs, a feature of the
Company's combination fixed/variable annuity products, were a significant
element of account deposits. Under these programs, which were redesigned in
late 1996, deposits are made into the fixed portion of the annuity contract
and receive a bonus rate of interest for the policy year. During the year,
the fixed deposit is systematically transferred to the variable portion of
the contract in equal periodic installments. DCA deposits overall were flat
in 1998 compared to 1997. This pattern resulted, in part, from heightened
competition, as other companies introduced similar DCA programs within the
41
<PAGE>
past year. During the 4th quarter of 1998, the Company introduced a higher
DCA rate and a new six-month DCA program. DCA deposits for that quarter were
higher, compared to the preceding 1998 quarters.
An increase in variable account deposits in 1998 reflected both the
continuing strong growth in equity markets generally and the continuing
strong performance of the investment funds underlying the Company's variable
annuity products. The continuing strong equity markets, low interest rate
environment, and demographic trends, among other factors, have increased the
demand and market for wealth accumulation products in the U.S., particularly
for variable annuities. These factors have contributed to the growth in the
Company's variable account deposits in 1998, despite heightened competition.
The Company introduced its Futurity line of products in February 1998.
Related deposits represented about 6% of the total for the Retirement
Products and Services segment in 1998, reflecting this recent introduction.
The Company expects that sales for the Futurity product will continue to
increase in the future, based on its beliefs that market demand is growing
for multi-manager variable annuity products, such as Futurity; that the
productivity of Futurity's wholesale distribution network, established in
1998, will continue to grow; and that the marketplace will respond favorably
to future introductions of new Futurity products and product enhancements.
- - HIGHER FEE INCOME RESULTING FROM HIGHER VARIABLE ANNUITY ACCOUNT BALANCES. The
main factors driving this growth in account balances have been market
appreciation and net deposit activity. This growth has generated corresponding
increases in fee income, since fees are determined based on the average assets
held in these accounts. Fee income increased by approximately $43 million, or
39%, in 1998.
- - WHILE THERE HAS BEEN A SHIFT TO VARIABLE ACCOUNTS FROM THE GENERAL ACCOUNT,
NET INVESTMENT INCOME HAS DECLINED. Net investment income reflects only income
earned on invested assets of the general account. In 1998, net investment
income for the Retirement Products and Services segment decreased by about $40
million, or 20%, compared to 1997, mainly as a result of the decline in
average invested assets in the Company's general account. This decline in
average general account assets mainly reflected the shift in deposits in
recent years from the fixed account to variable accounts. It also reflected
the Company's decision in 1997 to no longer market group pension and GIC
products.
- - LOWER POLICYHOLDER BENEFITS, MAINLY REFLECTING LOWER SURRENDER ACTIVITY
COMPARED TO 1997. During 1997 and into the first half of 1998, surrender and
withdrawal activity was high. This activity primarily related to a block of
separate account contracts that had been issued seven or more years previously
and for which the surrender charge periods had expired. While variable account
surrenders have continued to rise, general account surrenders have declined.
As a result of this pattern of activity, policyholder benefits (of which
surrenders and withdrawals, the related changes in the liability for premium
and other deposit funds, and related separate account transfers are the major
elements) increased in 1997 and were lower in 1998. The company expects that
as the separate account block of business continues to grow, and as a higher
proportion of it is no longer subject to surrender charges, surrenders will
tend to increase.
- - INVESTMENTS IN TECHNOLOGY AND INFRASTRUCTURE TO ENHANCE ANNUITY OPERATIONS. As
a result of these investments, operational expenses increased by approximately
$12 million, or 25%, in 1998 compared to 1997. These increases reflected three
main factors:
(1) Higher volumes of annuity business, requiring greater administrative
support. The Company expects that increases in the volume of its annuity
business will continue to have a similar effect on expenses in the near
term.
(2) Improvements to the computer systems and technology that support the
annuity business. These improvements involved information systems
supporting the growth of the Company's in-force business, particularly
its combination fixed/variable annuities. The Company expects to continue
to invest in its systems and technology in the future. The extent and
nature of these investments will depend on the Company's assessments of
the relative costs and benefits of given projects.
42
<PAGE>
(3) Costs associated with the product design and implementation of the new
Futurity multi-manager annuity product and the development of a new
product within the Regatta product line. The Company expects to continue
to invest in further product enhancements in the future.
1997 COMPARED TO 1996:
- - STRONG FIXED ACCOUNT DEPOSITS. Fixed account deposits in 1997 were
approximately $650 million, or 240%, higher than in 1996. This increase
resulted mainly from the Company's redesign of its DCA programs in late 1996.
The Company benefited at the time from the popularity of its DCA program
features and from the absence of major competitors offering similar features.
- - IN 1997, VARIABLE ANNUITY DEPOSITS WERE ABOUT $200 MILLION, OR 16%, LOWER THAN
IN 1996. THIS TREND REFLECTED HEIGHTENED COMPETITION, UNCERTAINTIES IN THE
MARKETPLACE REGARDING THE ATTRACTIVENESS OF VARIABLE ANNUITIES, AND CUSTOMER
PREFERENCES FOR DEPOSITING INTO THE DCA PROGRAMS RATHER THAN DIRECTLY INTO THE
VARIABLE ACCOUNTS.
- - HIGHER FEE INCOME RESULTING FROM HIGHER VARIABLE ANNUITY ACCOUNT BALANCES. The
main factors driving this growth in account balances were market appreciation
and net deposit activity. This growth generated corresponding increases in fee
income, since fees are determined based on the average assets held in these
accounts.
- - DECLINING GENERAL ACCOUNT BALANCES, RESULTING IN DECLINING NET INVESTMENT
INCOME. In 1997, net investment income for the Retirement Products and
Services segment decreased by about 16%, mainly as a result of a decline in
average invested assets in the Company's general account. This decline in
average general account assets mainly reflected the Company's decision in 1997
to no longer market group pension and GIC products.
- - HIGHER POLICYHOLDER BENEFITS, MAINLY REFLECTING HIGH SURRENDER ACTIVITY IN
1997. As noted above, surrender and withdrawal activity was high in 1997. This
activity primarily related to a block of separate account contracts that had
been issued seven or more years previously and for which the surrender charge
period had expired. As a result of this pattern of activity, policyholder
benefits (of which surrenders and withdrawals, the related changes in the
liability for premium and other deposit funds, and related separate account
transfers are the major elements) were unusually high in 1997 compared to
1996.
- - HIGHER COMMISSIONS. Commissions increased by approximately $22 million, or
20%, in 1997, directly reflecting higher sales of combination fixed/variable
annuity products in 1997 compared to 1996.
- - HIGHER OPERATIONAL EXPENSES. Operational expenses increased by approximately
$5 million, or 13%, as a result of the additional staffing needed to
administer higher volumes of business and because of non-recurring costs of
moving the Retirement Products and Services operations to a new facility.
INDIVIDUAL INSURANCE SEGMENT
The Individual Insurance segment comprises two main elements, internal
reinsurance and variable life products.
INTERNAL REINSURANCE
In recent years, the Company has had various reinsurance agreements with its
ultimate parent, Sun Life (Canada). In some of these arrangements, Sun Life
(Canada) has reinsured the mortality risks of individual life policies sold in
prior years by the Company. In another agreement, which became effective January
1, 1991 and terminated October 1, 1998, the Company reinsured certain individual
life insurance contracts issued by Sun Life (Canada). The latter agreement had a
significant effect on net income in both 1997 and 1998. The former agreements,
in the aggregate, also affected net income in those years, but to a much lesser
extent. The effects of these agreements on the Company's net income are
summarized in the following table.
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<PAGE>
INTERNAL REINSURANCE-EFFECT ON INCOME FROM OPERATIONS BEFORE INCOME TAXES
($ IN MILLIONS)
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
1991 Agreement
Effect on operations $ 24.6 $ 37.1 $ 35.2
Effect of termination 65.7
Other Agreements
Effect on operations (2.1) (1.4) (1.6)
--------- --------- ---------
Total $ 88.2 $ 35.7 $ 33.6
--------- --------- ---------
--------- --------- ---------
</TABLE>
Because the 1991 agreement was in effect only through the first nine
months of 1998, related net income was correspondingly lower in 1998 than in
1997. Also contributing to the lower 1998 net income from operations from this
agreement were proportionately higher death claims in 1998. The effect of
terminating this agreement was to further increase 1998 net income by $65.7
million. Neither the net income effect of this agreement's operations nor that
of its termination will recur. The termination-related increase in 1998
represents a reasonable approximation of the value of the stream of future
earnings that the agreement would have generated had it not been terminated.
VARIABLE LIFE PRODUCTS
This business includes the sale of individual variable life insurance
products, primarily the Company's variable universal life product for the
company-owned life insurance ("COLI") market. This product was introduced in
late 1997. The Company expects the variable life business to grow and become
more significant in the future.
CORPORATE SEGMENT
This segment includes the capital of the Company, its investments in
subsidiaries and items not otherwise attributable to either the Retirement
Products and Services and Individual Insurance segments. In 1998, income from
operations decreased by $65.3 million to $4.5 million for this segment. This
decrease reflected two main factors:
- Dividends from subsidiaries were lower than in 1997 by $37.5 million. This
decrease mainly resulted from a December 1997 reorganization, in which the
Company transferred its ownership of MFS to its parent company. As a
result of this reorganization, the Company received no dividends from MFS
in 1998. By comparison, it received $33.1 million of MFS dividends in
1997.
- Net investment income other than dividends from subsidiaries, was lower
than in 1997 by $5.9, reflecting the effect of the Company's December 1997
issuance of a $250 million surplus note to its upstream holding company.
Interest expense exceeded investment earnings on the related funds.
In 1997, income from operations for this segment decreased by $14.6
million to $69.8 million. This decrease mainly reflected a decrease, by
approximately $9 million, in dividends from subsidiaries. It also reflected
higher taxes and expenses.
FINANCIAL CONDITION AND LIQUIDITY
ASSETS
The Company's total assets comprise those held in its general account and
those held in its separate accounts. General account assets support general
account liabilities. Separate accounts and their assets are of two main types:
- Those assets held in a "fixed" separate account, which the Company
established for amounts that contract holders allocate to the fixed
portion of their combination fixed/variable deferred annuity contracts.
Fixed separate account assets are available to fund general account
liabilities and general account assets are available to fund the
liabilities of this fixed separate account. The
44
<PAGE>
Company manages the assets of this fixed separate account according to
general account investment policy guidelines.
- Those assets held in a number of registered and non-registered "variable"
separate accounts as investment vehicles for the Company's variable life
and annuity contracts. Policyholders may choose from among various
investment options offered under these contracts according to their
individual needs and preferences. Policyholders assume the investment
risks associated with these choices. General account and fixed separate
account assets are not available to fund the liabilities of these variable
accounts.
The following table summarizes significant changes in asset balances
during 1998 and 1997. The changes are discussed below.
<TABLE>
<CAPTION>
ASSETS % CHANGE
1998 1997 1996 1998/1997 1997/1996
---------- ---------- ---------- ------------ ------------
($ IN MILLIONS)
<S> <C> <C> <C> <C> <C>
General account assets $ 2,932.2 $ 4,513.5 $ 4,593.9 (35.0)% (1.75)%
Fixed separate account assets 2,195.6 2,343.9 2,108.8 (6.3)% 11.15%
---------- ---------- ---------- ------ ------
$ 5,127.8 $ 6,857.4 $ 6,702.7 (25.2)% 2.31%
Variable separate account assets 11,774.8 9,068.0 6,919.2 29.9% 31.06%
---------- ---------- ---------- ------ ------
Total assets $ 16,902.6 $ 15,925.4 $ 13,621.9 6.1% 16.91%
---------- ---------- ---------- ------ ------
---------- ---------- ---------- ------ ------
</TABLE>
General account and fixed separate account assets, taken together,
decreased by 25% in 1998; but variable separate account assets increased by 30%
that year. In 1997, growth in the general account and fixed separate account was
low; variable separate account assets increased by 31%. This growth in variable
accounts relative to the general and fixed accounts reflects two main factors:
appreciation of the funds held in the variable separate accounts has exceeded
that of the funds held in the general and fixed separate accounts; and annuity
deposits into variable accounts have increased, while annuity deposits into
fixed accounts have slowed. The Company believes this pattern has reflected a
shift in the preferences of policyholders, which is largely attributable to the
strong performance of equity markets in general and of the Company's variable
account funds in particular.
The assets of the general account are available to support general account
liabilities. For management purposes, it is the Company's practice to segment
its general account to facilitate the matching of assets and liabilities.
General account assets primarily comprise cash and invested assets, which
represented 98.7% of general account assets at year-end 1998. Major types of
invested asset holdings included bonds, mortgages, real estate and common stock.
The Company's bond holdings comprised 60.9% of the Company's portfolio at
year-end 1998. Bonds included both public and private issues. It is the
Company's policy to acquire only investment-grade securities. As a result, the
overall quality of the bond portfolio is high. At year-end 1998, only 5.3% were
rated below-investment-grade; i.e., they had National Association of Insurance
Commissioners ("NAIC") ratings lower than "1" or "2." The Company's mortgage
holdings amounted to $535.0 million at year-end 1998, representing 18.5% of the
total portfolio. All mortgage holdings at year-end 1998 were in good standing.
The Company believes that the high quality of its mortgage portfolio is largely
attributable to its stringent underwriting standards. At year-end 1998,
investment real estate amounted to $78.0 million, representing about 2.7% of the
total portfolio. The Company invests in real estate to enhance yields and,
because of the long-term nature of these investments, the Company uses them for
purposes of matching with products having long-term liability durations. Common
stock holdings amounted to $128.4 million, representing about 4.4% of the
portfolio. These holdings comprised the Company's ownership shares in
subsidiaries.
Other general account assets decreased by $1,021.4 million in 1998. This
change primarily reflected the effect of terminating the internal reinsurance
agreement with the Company's ultimate parent, discussed in "Internal
Reinsurance," above.
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<PAGE>
LIABILITIES
As with assets, the proportion of variable separate account liabilities to
total liabilities has been increasing. Most of the Company's liabilities
comprise reserves for life insurance and for annuity contracts and deposit
funds. The Company expects the declining trend in general account liabilities to
continue, because it believes that net maturities will continue to exceed sales
for the fixed contracts associated with these liabilities. This trend stems
mainly from the Company's 1997 decision to discontinue selling group pension and
GIC contracts and to focus its marketing efforts on its combination
fixed/variable annuity products.
In December 1997, the Company borrowed $110.0 million from Sun Life
Assurance Company of Canada -- U.S. Operations Holdings, Inc. ("U.S. Holdco"),
an upstream holding company. The Company repaid this note during the first
quarter of 1998.
The termination of the internal reinsurance agreement discussed above
resulted in a $1.0 billion decrease in liabilities as compared to 1997.
CAPITAL MARKETS RISK MANAGEMENT
See "Quantitative and Qualitative Disclosures About Market Risk," below
for a discussion of the Company's capital markets risk management.
CAPITAL RESOURCES
CAPITAL ADEQUACY
The National Association of Insurance Commissioners ("NAIC") adopted
regulations at the end of 1993 that established minimum capitalization
requirements for insurance companies, based on risk-based capital ("RBC")
formulas. These requirements are intended to identify undercapitalized
companies, so that specific regulatory actions can be taken on a timely basis.
The RBC formula for life insurance companies sets capital requirements related
to asset, insurance, interest rate, and business risks. According to the RBC
calculation, the Company's capital was well in excess of its required capital at
year-end 1998.
LIQUIDITY
The Company's liquidity requirements are generally met by funds from
operations. The Company's main uses of funds are to pay out death benefits and
other maturing insurance and annuity contract obligations; to make pay-outs on
contract terminations; to purchase new investments; to fund new business
ventures; and to pay normal operating expenditures and taxes. The Company's main
sources of funds are premiums and deposits on insurance and annuity products;
proceeds from the sale of investments; income from investments; and repayments
of investment principal.
In managing its general account and fixed separate account assets in
relation to its liabilities, the Company has segmented these assets by product
or by groups of products. The Company manages each segment's assets based on an
investment policy that it has established for that segment. Among other matters,
this investment policy considers liquidity requirements and provides cash flow
estimates. The Company reviews these policies quarterly.
The Company's liquidity targets are intended to enable it to meet its
day-to-day cash requirements. On a quarterly basis, the Company compares its
total "liquifiable" assets to its total demand liabilities. Liquifiable assets
comprise cash and assets that could quickly be converted to cash should the need
arise. These assets include short-term investments and other current assets and
investment-grade bonds. The Company's policy is to maintain a liquidity ratio in
excess of 100%, and it did so throughout 1998. Based on its ongoing liquidity
analyses, the Company believes that its available liquidity is more than
sufficient to meet its liquidity needs.
46
<PAGE>
DEMUTUALIZATION
On January 27, 1998, SLOC announced that its Board of Directors requested
management world-wide to develop a plan to convert from a mutual life insurance
company into a publicly traded stock company through demutualization worldwide.
Management has put in place a full time task force which, together with a
worldwide team of actuarial, financial and legal advisers, has begun work. The
Board will decide later this year whether to proceed with demutualization,
following the completion of the plan. Demutualization would require regulatory
and policyholder approval. Based on information known to date, the potential
demutualization of SLOC is not expected to have any significant impact on the
Company.
YEAR 2000 COMPLIANCE
During the fourth quarter of 1996, the Company, Sun Life (Canada) and
affiliates began a comprehensive analysis of its information technology ("IT")
and non-IT systems, including its hardware, software, data, data feed products,
and internal and external supporting services, to address the ability of these
systems to correctly process date calculations through the year 2000 and beyond.
The Company created a full-time Year 2000 project team in early 1997 to manage
this endeavor across the Company. This team, which works with dedicated
personnel from all business units and with the legal and audit departments,
reports directly to the Company's senior management on a monthly basis. In
addition, the Company's Year 2000 project is periodically reviewed by internal
and external auditors.
To date, relevant systems have been identified and their components
inventoried, needed resolutions have been documented, timelines and project
plans have been developed, remediation and testing are in process. Over 90% of
the components have been remediated and tested and are certified as Year 2000
compliant. The majority of the remaining components are in the testing phase and
are expected to be certified over the course of 1999.
In mid-1997, the project team contacted all key vendors to obtain either
their certification for the products and services provided or their plan to make
those products and services compliant. Approximately 95% of these vendors have
responded, and the project team has reviewed the responses and validated and
conducted tests with the vendors where appropriate. In addition, the project
team continues to work with critical business partners, such as third-party
administrators, investment property managers, investment mortgage
correspondents, and others, with the goal that these partners will continue to
be able to support the Company's objective of assuring Year 2000 compliance.
Non-IT applications, including building security, HVAC systems, and other
such systems will be tested. Compliant client server and mainframe environments
have been built which allow for testing of critical dates such as December 31,
1999, January 1, 2000, February 28, 2000, February 29, 2000, and March 1, 2000
without impact to current production.
Although the Company expects all critical systems to be Year 2000
compliant before the end of 1999, there can be no assurance that this result
will be completely achieved. Factors giving rise to this uncertainty include
possible loss of technical resources to perform the work, failure to identify
all susceptible systems, non-compliance by third-parties whose systems and
operations affect the Company, and other similar uncertainties. A possible
worst-case scenario might include one or more of the Company's significant
systems being non-compliant. Such a scenario could result in material disruption
to the Company's operations. Consequences of such disruptions could include,
among other possibilities, the inability to update customers' accounts, process
payments and other financial transactions; and report accurate data to
management, customers, regulators, and others. Consequences also could include
business interruptions or shutdowns, reputational harm, increased scrutiny by
regulators, and litigation related to Year 2000 issues. Such potential
consequences, depending on their nature and duration, could have a material
impact on the Company's results of operations and financial position.
In order to mitigate the risks to the Company of material adverse
operational or financial impacts from failure to achieve planned Year 2000
compliance, the Company has established contingency planning at the business
unit and corporate levels. Each business unit has ranked its applications as
being of high, medium or low business risk to ensure that the most critical are
addressed first. The
47
<PAGE>
business units also have developed alternate plans of action where possible, and
established dates for the alternate plans to be enacted. On the corporate level,
the Company is in the process of enhancing its business continuation plan, by
identifying minimum requirements for facilities, computing, staffing, and other
factors; and it is developing a plan to support those requirements.
As of December 31, 1998, the Company expended, cumulatively, approximately
$4.2 million on its Year 2000 effort, and it expects to incur a further $1.3
million on this effort in 1999.
SALE OF SUBSIDIARY
In February 1999, the Company completed the sale of its wholly-owned
subsidiary, Massachusetts Casualty Insurance Company (MCIC) to Centre Solutions
(U.S) Limited, a wholly-owned subsidiary of Centre Reinsurance Holdings, Limited
for approximately $34 million. MCIC sold individual disability insurance
throughout the U.S. This transaction is not expected to have a significant
effect on the operations of the Company
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
This discussion covers market risks associated with investment portfolios
that support the Company's general account liabilities. This discussion does not
cover market risks associated with those investment portfolios that support
separate account products. For these products, the policyholder, rather than the
Company, assumes these market risks.
GENERAL
The assets of the general account are available to support general account
liabilities. For purposes of managing these assets in relation to these
liabilities, the company notionally segments these assets by product or by
groups of products. The Company manages each segment's assets based on an
investment policy that it has established for that segment. The policy covers
the segment's liability characteristics and liquidity requirements, provides
cash flow estimates, and sets targets for asset mix, duration, and quality. Each
quarter, investment and business unit managers review these policies to ensure
that the policies remain appropriate, taking into account each segment's
liability characteristics.
TYPES OF MARKET RISKS
The Company's stringent underwriting standards and practices have resulted
in high-quality portfolios and have the effect of limiting credit risk. It is
the Company's policy, for example, not to purchase below-investment-grade
securities. Also, as a matter of investment policy, the Company assumes no
foreign currency or commodity risk; nor does it assume equity price risk except
to the extent that it holds real estate in its portfolios. (At year-end 1998,
investment real estate holdings represented approximately 3% of its total
general account portfolio.) The management of interest rate risk exposure is
discussed below.
INTEREST RATE RISK MANAGEMENT
The Company's fixed interest rate liabilities are primarily supported by
well diversified portfolios of fixed interest investments. They are also
supported by holdings of real estate and floating rate notes. All of these fixed
interest investments are held for other than trading purposes and can include
publicly issued and privately placed bonds and commercial mortgage loans. Public
bonds can include Treasury bonds, corporate bonds, and money market instruments.
The Company's fixed income portfolios also hold securitized assets, including
mortgage-backed securities (MBS) and asset-backed securities. These securities
are subject to the same standards applied to other portfolio investments,
including relative value criteria and diversification guidelines. In portfolios
backing interest-sensitive liabilities, the Company's policy is to limit MBS
holdings to less than 10% of total portfolio assets. In all portfolios, the
Company restricts MBS investments to pass-through securities issued by U.S.
government agencies and to collateralized mortgage obligations, which are
expected to exhibit relatively low volatility. The Company does not engage in
leveraged transactions and it does not invest in the more speculative forms of
these instruments such as the interest-only, principal-only, inverse floater, or
residual tranches.
48
<PAGE>
Changes in the level of domestic interest rates affect the market value of
fixed interest assets and liabilities. Segments whose liabilities mainly arise
from the sale of products containing interest rate guarantees for certain terms
are sensitive to changes in interest rates. In these segments, the Company uses
"immunization" strategies, which are specifically designed to minimize the loss
from wide fluctuations in interest rates. The Company supports these strategies
using analytical and modeling software acquired from outside vendors.
Significant features of the Company's immunization models include:
- an economic or market value basis for both assets and liabilities;
- an option pricing methodology;
- the use of effective duration and convexity to measure interest rate
sensitivity;
- the use of "key rate durations" to estimate interest rate exposure at
different parts of the yield curve and to estimate the exposure to
non-parallel shifts in the yield curve.
The Company's Interest Rate Risk Committee meets monthly. After reviewing
duration analyses, market conditions and forecasts, the Committee develops
specific asset management strategies for the interest-sensitive portfolios.
These strategies may involve managing to achieve small intentional mismatches,
either in terms of total effective duration or for certain key rate durations,
between the liabilities and related assets of particular segments. The Company
manages these mismatches to a tolerance range of plus or minus 0.5.
Asset strategies may include the use of Treasury futures or interest rate
swaps to adjust the duration profiles for particular portfolios. All derivative
transactions are conducted under written operating guidelines and are marked to
market. Total positions and exposures are reported to the Board of Directors on
a monthly basis. The counterparties to hedging transactions are major highly
rated financial institutions, with respect to which the risk of the Company's
incurring losses related to credit exposures is considered remote.
Liabilities categorized as financial instruments and held in the Company's
general account at December 31, 1998 had a fair value of $1,538.3 million. Fixed
income investments supporting those liabilities had a fair value of $2,710.1
million at that date. The Company performed a sensitivity analysis on these
interest-sensitive liabilities and assets at December 31, 1998. The analysis
showed that if there were an immediate increase of 100 basis points in interest
rates, the fair value of the liabilities would show a net decrease of $46.3
million and the corresponding assets would show a net decrease of $113.2
million.
By comparison, liabilities categorized as financial instruments and held
in the Company's general account at December 31, 1997 had a fair value of
$1,986.4 million. Fixed income investments supporting those liabilities had a
fair value of $3,276.2 million at that date. The Company performed a sensitivity
analysis on these interest-sensitive liabilities and assets at December 31,
1997. The analysis showed that if there were an immediate increase of 100 basis
points in interest rates, the fair value of the liabilities would show a net
decrease of $56.0 million and the corresponding assets would show a net decrease
of $108.0 million.
The Company produced these estimates using computer models. Since these
models reflect assumptions about the future, they contain an element of
uncertainty. For example, the models contain assumptions about future
policyholder behavior and asset cash flows. Actual policyholder behavior and
asset cash flows could differ from what the models show. As a result, the
models' estimates of duration and market values may not reflect what actually
will occur. The models are further limited by the fact that they do not provide
for the possibility that management action could be taken to mitigate adverse
results. The Company believes that this limitation is one of conservatism; that
is, it will tend to cause the models to produce estimates that are generally
worse than one might actually expect, all other things being equal.
49
<PAGE>
Based on its processes for analyzing and managing interest rate risk, the
Company believes its exposure to interest rate changes will not materially
affect its near-term financial position, results of operations, or cash flows.
REINSURANCE
The Company has agreements with Sun Life (Canada) which provide that Sun
Life (Canada) will reinsure the mortality risks of the individual life insurance
contracts previously sold by the Company. Under these agreements, basic death
benefits and supplementary benefits are reinsured on a yearly renewable term
basis and coinsurance basis, respectively. Reinsurance transactions under these
agreements in 1998 had the effect of decreasing net income from operations by
$2,128,000.
Effective January 1, 1991 the Company entered into an agreement with Sun
Life (Canada) under which certain individual life insurance contracts issued by
Sun Life (Canada) were reinsured by the Company on a 90% coinsurance basis. Also
effective January 1, 1991 the Company entered into an agreement with Sun Life
(Canada) which provides that Sun Life (Canada) will reinsure the mortality risks
in excess of $500,000 per policy for the individual life insurance contracts
assumed by the Company in the reinsurance agreement described above. Death
benefits are reinsured on a yearly renewable term basis. The life reinsurance
assumed agreement requires the reinsurer to withhold funds in an amount equal to
the reserves assumed. The Company terminated these agreements, effective October
1, 1998, resulting in an increase in income from operations by approximately
$65,679,000 which included a cash settlement.
The Company has also executed reinsurance agreements with unaffiliated
companies. These agreements provide reinsurance of certain individual life
insurance contracts on a modified coinsurance basis under which all deficiency
reserves are ceded; as well as reinsurance for variable universal life on a
yearly renewable term basis for which the Company has a maximum retention of
$2,000,000.
RESERVES
In accordance with the life insurance laws and regulations under which the
Company operates, it is obligated to carry on its books, as liabilities,
actuarially determined reserves to meet its obligations on its outstanding
contracts. Reserves are based on mortality tables in general use in the United
States and are computed to equal amounts that, with additions from premiums to
be received, and with interest on such reserves compounded annually at certain
assumed rates, will be sufficient to meet the Company's policy obligations at
their maturities or in the event of an insured's death. In the accompanying
Financial Statements, these reserves are determined in accordance with statutory
regulations.
INVESTMENTS
Of the Company's total assets of $16.9 billion at December 31, 1998, 82.7%
($13.98 billion) consisted of unitized and non-unitized separate account assets,
10.4% ($1.76 billion) was invested in bonds and similar securities, 3.2% ($541
million) was invested in mortgages, 0.7% ($118.3 million) was invested in
subsidiaries, 0.6% ($101.4 million) was invested in real estate, and the
remaining 2.4% ($405.6 million) was invested in cash and other assets.
COMPETITION
The Company is engaged in a business that is highly competitive because of
the large number of stock and mutual life insurance companies and other entities
marketing insurance products. According to a 1998 statistical study published by
A.M. Best, the Company ranked 37th among all life insurance companies in the
United States based upon total assets as of December 31, 1997. Its ultimate
parent company, Sun Life (Canada), ranked 21st.
EMPLOYEES
The Company and Sun Life (Canada) have entered into a service agreement
which provides that the latter will furnish the Company, as required, with
personnel as well as certain services and facilities
50
<PAGE>
on a cost reimbursement basis. As of March 31, 1999, the Company had 392 direct
employees who are employed at its Principal Executive Office in Wellesley Hills,
Massachusetts and at its Retirement Products and Services Division in Boston,
Massachusetts.
PROPERTIES
The Company occupies office space owned by it and leased to Sun Life
(Canada), and certain unrelated parties for lease terms not exceeding five
years. Rent received by the Company under the leases amounted to approximately
$6,856,000 in 1998.The Company also occupies office space which it leases from
unaffiliated parties for various lease terms.
STATE REGULATION
The Company is subject to the laws of the State of Delaware governing life
insurance companies and to regulation by the Commissioner of Insurance of
Delaware. An annual statement is filed with the Commissioner of Insurance on or
before March lst in each year relating to the operations of the Company for the
preceding year and its financial condition on December 31st of such year. Its
books and records are subject to review or examination by the Commissioner or
his agents at any time and a full examination of its operations is conducted at
periodic intervals.
The Company is also subject to the insurance laws and regulations of the
other states and jurisdictions in which it is licensed to operate. The laws of
the various jurisdictions establish supervisory agencies with broad
administrative powers with respect to licensing to transact business, overseeing
trade practices, licensing agents, approving policy forms, establishing reserve
requirements, fixing maximum interest rates on life insurance policy loans and
minimum rates for accumulation of surrender values, prescribing the form and
content of required financial statements and regulating the type and amounts of
investments permitted. Each insurance company is required to file detailed
annual reports with supervisory agencies in each of the jurisdictions in which
it does business and its operations and accounts are subject to examination by
such agencies at regular intervals.
In addition, many states regulate affiliated groups of insurers, such as
the Company, its parent and its affiliates, under insurance holding company
legislation. Under such laws, inter-company transfers of assets and dividend
payments from insurance subsidiaries may be subject to prior notice or approval,
depending on the size of such transfers and payments in relation to the
financial positions of the companies involved.
Under insurance guaranty fund laws in most states, insurers doing business
therein can be assessed (up to prescribed limits) for policyholder losses
incurred by insolvent companies. The amount of any future assessments of the
Company under these laws cannot be reasonably estimated. However, most of these
laws do provide that an assessment may be excused or deferred if it would
threaten an insurer's own financial strength and many permit the deduction of
all or a portion of any such assessment from any future premium or similar taxes
payable.
Although the federal government generally does not directly regulate the
business of insurance, federal initiatives often have an impact on the business
in a variety of ways. Current and proposed federal measures which may
significantly affect the insurance business include employee benefit regulation,
removal of barriers preventing banks from engaging in the insurance business,
tax law changes affecting the taxation of insurance companies, the tax treatment
of insurance products and its impact on the relative desirability of various
personal investment vehicles.
LEGAL PROCEEDINGS
There are no pending legal proceedings affecting the Variable Account. We
and our subsidiaries are engaged in various kinds of routine litigation which,
in management's judgment, is not of material importance to our respective total
assets or material with respect to the Variable Account.
51
<PAGE>
ACCOUNTANTS
The financial statements of the Variable Account for the year ended
December 31, 1998 included in the Statement of Additional Information and the
statutory financial statements of the Company for the years ended December 31,
1998, 1997 and 1996 included in this Prospectus have been audited by Deloitte &
Touche LLP, independent auditors, as stated in their reports appearing herein,
and are included in reliance upon the report of such firm given upon their
authority as experts in accounting and auditing.
FINANCIAL STATEMENTS
The financial statements of the Company which are included in this
Prospectus should be considered only as bearing on the ability of the Company to
meet its obligations with respect to amounts allocated to the Fixed Account and
with respect to the death benefit and the Company's assumption of the mortality
and expense risks. They should not be considered as bearing on the investment
performance of the Series Fund shares held in the Sub-Accounts of the Variable
Account.
The financial statements of the Variable Account for the year ended
December 31, 1998 are included in the Statement of Additional Information.
------------------------
52
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
STATUTORY STATEMENTS OF ADMITTED ASSETS, LIABILITIES AND
CAPITAL STOCK AND SURPLUS
DECEMBER 31, 1998 AND 1997 (IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
ADMITTED ASSETS
Bonds $ 1,763,468 $ 1,910,699
Common stocks 128,445 117,229
Mortgage loans on real estate 535,003 684,035
Properties acquired in satisfaction of debt 17,207 22,475
Investment real estate 78,021 78,426
Policy loans 41,944 40,348
Cash and short-term investments 265,226 544,418
Other invested assets 64,177 55,716
Life insurance premiums and annuity considerations due and uncollected -- 9,203
Investment income due and accrued 35,706 39,279
Federal income tax recoverable and interest thereon 1,110 --
Receivable from parent, subsidiaries and affiliates -- 27,136
Funds withheld on reinsurance assumed -- 982,653
Other assets 1,928 1,842
------------- -------------
General account assets 2,932,235 4,513,459
Separate account assets:
Unitized 11,774,745 9,068,021
Non-unitized 2,195,641 2,343,877
------------- -------------
Total Admitted Assets $ 16,902,621 $ 15,925,357
------------- -------------
------------- -------------
LIABILITIES
Aggregate reserve for life policies and contracts $ 1,216,107 $ 2,188,243
Supplementary contracts 1,885 2,247
Policy and contract claims 369 2,460
Provision for policyholders' dividends and coupons payable -- 32,500
Liability for premium and other deposit funds 1,000,875 1,450,705
Surrender values on cancelled policies 5 215
Interest maintenance reserve 40,490 33,830
Commissions to agents due or accrued 2,615 2,826
General expenses due or accrued 5,932 6,238
Transfers from Separate Accounts due or accrued (361,863) (284,078)
Taxes, licenses and fees due or accrued, excluding FIT 401 105
Federal income taxes due or accrued 25,019 56,384
Unearned investment income 23 34
Amounts withheld or retained by company as agent or trustee 529 47
Remittances and items not allocated 5,176 1,363
Borrowed money -- 110,142
Asset valuation reserve 44,392 47,605
Payable to parent, subsidiaries, and affiliates 30,381 --
Payable for securities 428 27,104
Other liabilities 9,770 2,924
------------- -------------
General account liabilities 2,022,534 3,680,894
Separate account liabilities:
Unitized 11,774,522 9,067,891
Non-unitized 2,195,641 2,343,877
------------- -------------
Total liabilities 15,992,697 15,092,662
------------- -------------
CAPITAL STOCK AND SURPLUS
Common capital stock 5,900 5,900
------------- -------------
Surplus notes 565,000 565,000
Gross paid in and contributed surplus 199,355 199,355
Unassigned funds 139,669 62,440
------------- -------------
Surplus 904,024 826,795
------------- -------------
Total common capital stock and surplus 909,924 832,695
------------- -------------
Total Liabilities, Capital Stock and Surplus $ 16,902,621 $ 15,925,357
------------- -------------
------------- -------------
</TABLE>
SEE NOTES TO STATUTORY FINANCIAL STATEMENTS.
53
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
STATUTORY STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (IN 000'S)
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
INCOME:
Premiums and annuity considerations $ 210,198 $ 254,066 $ 266,942
Deposit-type funds 2,140,604 2,155,297 1,775,230
Considerations for supplementary
contracts without life
contingencies and dividend
accumulations 2,086 1,615 2,340
Net investment income 184,532 270,249 303,753
Amortization of interest maintenance
reserve 2,282 1,166 1,557
Income from fees associated with
investment management and
administration and contract
guarantees from Separate Account 141,211 109,757 83,278
Net gain from operations from
Separate Account -- 5 --
Other income 87,364 102,889 87,532
---------- ---------- ----------
Total 2,768,277 2,895,044 2,520,632
---------- ---------- ----------
BENEFITS AND EXPENSES:
Death benefits 15,335 17,284 12,394
Annuity benefits 153,636 148,135 146,654
Disability benefits and benefits
under accident and health policies 104 132 105
Surrender benefits and other fund
withdrawals 1,933,833 1,854,004 1,507,263
Interest on policy or contract funds (140) 699 2,205
Payments on supplementary contracts
without life contingencies and
dividend accumulations 2,528 1,687 2,120
Increase (decrease) in aggregate
reserves for life and accident and
health policies and contracts (972,135) 127,278 162,678
Decrease in liability for premium
and other deposit funds (449,831) (447,603) (392,348)
Increase (decrease) in reserve for
supplementary contracts without
life contingencies and for
dividend and coupon accumulations (362) 42 327
---------- ---------- ----------
Total 682,968 1,701,658 1,441,398
Commissions on premiums and annuity
considerations (direct business
only) 137,718 132,700 109,894
Commissions and expense allowances
on reinsurance assumed 13,032 17,951 18,910
General insurance expenses 58,132 46,624 37,206
Insurance taxes, licenses and fees,
excluding federal income taxes 7,388 8,267 8,431
Increase (decrease) in loading on
and cost of collection in excess
of loading on deferred and
uncollected premiums (1,663) 523 901
Net transfers to Separate Accounts 722,851 844,130 761,941
Reserve and fund adjustments on
reinsurance terminated 1,017,112 -- --
---------- ---------- ----------
Total 2,637,538 2,751,853 2,378,681
---------- ---------- ----------
Net gain from operations before
dividends to policyholders and
Federal Income Taxes 130,739 143,191 141,951
Dividends to policyholders (5,981) 33,316 29,189
---------- ---------- ----------
Net gain from operations after
dividends to policyholders and
before Federal Income Taxes 136,720 109,875 112,762
Federal income tax expense
(benefit), (excluding tax on
capital gains) 11,713 7,339 (5,400)
---------- ---------- ----------
Net gain from operations after
dividends to policyholders and
federal income taxes and before
realized capital gains 125,007 102,536 118,162
Net realized capital gains less
capital gains tax and transferred
to the IMR 394 26,706 4,862
---------- ---------- ----------
NET INCOME $ 125,401 $ 129,242 $ 123,024
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
SEE NOTES TO STATUTORY FINANCIAL STATEMENTS.
54
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
STATUTORY STATEMENTS OF CHANGES IN CAPITAL STOCK AND SURPLUS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (IN 000'S)
<TABLE>
<CAPTION>
1998 1997 1996
---------- ----------- -----------
<S> <C> <C> <C>
Capital and surplus, Beginning of year $ 832,695 $ 567,143 $ 792,452
---------- ----------- -----------
Net income 125,401 129,242 123,024
Change in net unrealized capital gains (losses) (384) 1,152 (1,715)
Change in non-admitted assets and related items (1,086) (463) 67
Change in reserve on account of change in valuation basis -- 39,016 --
Change in asset valuation reserve 3,213 6,307 (11,812)
Surplus (contributed to) withdrawn from Separate Accounts
during period 82 -- 100
Other changes in surplus in Separate Accounts Statements 10 -- --
Change in surplus notes -- 250,000 (335,000)
Dividends to stockholders (50,000) (159,722) --
Aggregate write-ins for gains and losses in surplus (7) 20 27
---------- ----------- -----------
Net change in capital and surplus for the year 77,229 265,552 (225,309)
---------- ----------- -----------
Capital and surplus, End of year $ 909,924 $ 832,695 $ 567,143
---------- ----------- -----------
---------- ----------- -----------
</TABLE>
SEE NOTES TO STATUTORY FINANCIAL STATEMENTS.
55
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
STATUTORY STATEMENTS OF CASH FLOW
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Cash Provided by Operations:
Premiums, annuity considerations and
deposit funds received $ 2,361,669 $ 2,410,919 $ 2,059,577
Considerations for supplementary
contracts and dividend accumulations
received 2,086 1,615 2,340
Net investment income received 236,944 345,279 324,914
Other income received 253,147 208,223 88,295
----------- ----------- -----------
Total receipts 2,853,846 2,966,036 2,475,126
----------- ----------- -----------
Benefits paid (other than dividends) 2,107,736 2,020,747 1,671,483
Insurance expenses and taxes paid
(other than federal income and
capital gains taxes) 217,023 203,650 172,015
Net cash transferred to Separate
Accounts 800,636 895,465 755,605
Dividends paid to policyholders 26,519 28,316 22,689
Federal income tax payments
(recoveries),(excluding tax on
capital gains) 46,965 1,397 (15,363)
Other--net (138) 698 2,205
----------- ----------- -----------
Total payments 3,198,741 3,150,273 2,608,634
----------- ----------- -----------
Net cash used in operations (344,895) (184,237) (133,508)
----------- ----------- -----------
Proceeds from long-term investments
sold, matured or repaid (after
deducting taxes on capital gains of
$2,038 for 1998, $750 for 1997 and
$1,555 for 1996) 1,261,396 1,343,803 1,768,147
Issuance (repayment) of surplus notes -- 250,000 (335,000)
Other cash provided (used) (40,529) 71,095 147,956
----------- ----------- -----------
Total cash provided 1,220,867 1,664,898 1,581,103
----------- ----------- -----------
Cash Applied:
Cost of long-term investments acquired (967,901) (773,783) (1,318,880)
Other cash applied (187,263) (310,519) (177,982)
----------- ----------- -----------
Total cash applied (1,155,164) (1,084,302) (1,496,862)
Net change in cash and short-term
investments (279,192) 396,359 (49,267)
Cash and short-term investments:
Beginning of year 544,418 148,059 197,326
----------- ----------- -----------
End of year $ 265,226 $ 544,418 $ 148,059
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
SEE NOTES TO STATUTORY FINANCIAL STATEMENTS.
56
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL
Sun Life Assurance Company of Canada (U.S.) (the "Company") is incorporated as a
life insurance company and is currently engaged in the sale of individual
variable life insurance, individual fixed and variable annuities, group fixed
and variable annuities and group pension contracts.
Effective May 1, 1997, the Company became a wholly-owned subsidiary of the newly
established Sun Life of Canada (U.S.) Holdings, Inc. ("Life Holdco"). On
December 18, 1997, Life Holdco became a wholly-owned subsidiary of the Sun Life
Assurance Company of Canada -- U.S. Operations Holdings, Inc. ("US Holdco"). US
Holdco is a wholly-owned subsidiary of Sun Life Assurance Company of Canada
("SLOC"). Prior to December 18, 1997, Life Holdco was a direct wholly-owned
subsidiary of SLOC.
The Company, which is domiciled in the State of Delaware, prepares its financial
statements in accordance with statutory accounting practices prescribed or
permitted by the State of Delaware Insurance Department. Prescribed accounting
practices include practices described in a variety of publications of the
National Association of Insurance Commissioners ("NAIC"), as well as state laws,
regulations and general administrative rules. Permitted accounting practices
encompass all accounting practices not so prescribed. The permitted accounting
practices adopted by the Company are not material to the financial statements.
Prior to 1996, statutory accounting practices were recognized by the insurance
industry and the accounting profession as generally accepted accounting
principles for mutual life insurance companies and stock life insurance
companies wholly-owned by mutual life insurance companies. In April 1993, the
Financial Accounting Standards Board ("FASB") issued an interpretation (the
"Interpretation"), that became effective in 1996, which changed the previous
practice of mutual life insurance companies (and stock life insurance companies
that are wholly-owned subsidiaries of mutual life insurance companies) with
respect to utilizing statutory basis financial statements for general purposes,
in that it will no longer allow such financial statements to be described as
having been prepared in conformity with generally accepted accounting principles
("GAAP"). Consequently, these financial statements prepared in conformity with
statutory accounting practices, as described above, vary from and are not
intended to present the Company's financial position, results of operations or
cash flow in conformity with generally accepted accounting principles. (See Note
20 for further discussion relative to the Company's basis of financial statement
presentation.) The effects on the financial statements of the variances between
the statutory basis of accounting and GAAP, although not reasonably
determinable, are presumed to be material.
INVESTED ASSETS
Bonds are carried at cost, adjusted for amortization of premium or accrual of
discount. Investments in non-insurance subsidiaries are carried on the equity
basis. Investments in mortgage backed securities are generally carried at
amortized cost. Changes in prepayment assumptions and resulting cash flows are
evaluated periodically. The adjusted yield is used to calculate investment
income in future periods. If current book value exceeds future undiscounted cash
flows, a realized capital loss is recorded and amortized through IMR.
Investments in insurance subsidiaries are carried at their statutory surplus
values. Mortgage loans acquired at a premium or discount are carried at
amortized values and other mortgage loans are carried at the amounts of the
unpaid balances. Real estate investments are carried at the lower of cost,
adjusted for accumulated depreciation or appraised value, less encumbrances.
Short-term investments are carried at amortized cost, which approximates fair
value. Depreciation of buildings and improvements is calculated using the
straight-line method over the estimated useful life of the property, generally
40 to 50 years.
57
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
POLICY AND CONTRACT RESERVES
The reserves for life insurance and annuity contracts, developed by accepted
actuarial methods, have been established and maintained on the basis of
published mortality tables using assumed interest rates and valuation methods
that will provide reserves at least as great as those required by law and
contract provisions.
INCOME AND EXPENSES
For life and annuity contracts, premiums are recognized as revenues over the
premium paying period, whereas commissions and other costs applicable to the
acquisition of new business are charged to operations as incurred.
SEPARATE ACCOUNTS
The Company has established unitized separate accounts applicable to various
classes of contracts providing for variable benefits. Contracts for which funds
are invested in separate accounts include variable life insurance and individual
and group qualified and non-qualified variable annuity contracts.
Assets and liabilities of the separate accounts, representing net deposits and
accumulated net investment earnings less fees, held primarily for the benefit of
contract holders, are shown as separate captions in the financial statements.
Assets held in the separate accounts are carried at market value as determined
by quoted market prices of the underlying investments.
The Company has also established a non-unitized separate account for amounts
allocated to the fixed portion of certain combination fixed/variable deferred
annuity contracts. The assets of this account are available to fund general
account liabilities, and general account assets are available to fund
liabilities of this account.
Gains (losses) from mortality experience and investment experience of the
separate accounts, not applicable to contract owners, are transferred to (from)
the general account. Accumulated gains (losses) that have not been transferred
are recorded as a payable (receivable) to (from) the general account. Amounts
payable to the general account of the Company were $361,863,000 in 1998 and
$284,078,000 in 1997.
CHANGES IN ACCOUNTING PRINCIPLES AND REPORTING
As described more fully in Note 10, during 1997 the Company changed certain
assumptions used in determining actuarial reserves.
In March 1998, the National Association of Insurance Commissioners adopted the
Codification of Statutory Accounting Principles ("Codification"). The
Codification, which is intended to standardize regulatory accounting and
reporting for the insurance industry, is proposed to be effective January 1,
2001. However, statutory accounting principles will continue to be established
by individual state laws and permitted practices and it is uncertain when, or
if, the state of Delaware will require adoption of Codification for the
preparation of statutory financial statements. The Company has not finalized the
quantification of the effects of Codification on its statutory financial
statements.
OTHER
Preparation of the financial statements requires management to make estimates
and assumptions that affect reported amounts of assets, liabilities, revenues
and expenses. Actual results could differ from those estimates.
Certain prior year amounts have been reclassified to conform to amounts as
presented in the current year.
58
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
2. INVESTMENTS IN SUBSIDIARIES
The Company owns all of the outstanding shares of Sun Life Insurance and Annuity
Company of New York ("Sun Life (N.Y.)"), Massachusetts Casualty Insurance
Company ("MCIC"), Sun Life of Canada (U.S.) Distributors, Inc. (formerly Sun
Investment Services Company) ("Sundisco"), New London Trust, F.S.B. ("NLT"), Sun
Life Financial Services Limited ("SLFSL"), Sun Benefit Services Company, Inc.
("Sunbesco"), Sun Capital Advisers, Inc. ("Sun Capital"), Sun Life Finance
Corporation ("Sunfinco"), Sun Life of Canada (U.S.) SPE 97-1, Inc. ("SPE 97-1"),
Clarendon Insurance Agency, Inc. ("Clarendon") and Sun Life Information Services
Ireland Ltd. ("SLISL").
On February 5, 1999, the Company finalized the sale of MCIC, a disability
insurance company which issues primarily individual disability income policies,
to Centre Solutions (U.S.) Limited, a wholly-owned subsidiary of Centre
Reinsurance Holdings Limited for approximately $34 million. The impact of this
sale to the ongoing operations of the Company is not expected to be material.
On September 28, 1998, the Company formed SLISL as an offshore technology center
for the purpose of completing systems projects for affiliates.
On October 30, 1997, the Company established a wholly-owned special purpose
corporation, SPE 97-1, for the purpose of engaging in activities incidental to
securitizing mortgage loans.
On December 31, 1997, the Company purchased from Massachusetts Financial
Services ("MFS") all of the outstanding shares of Clarendon, a registered
broker-dealer that acts as the general distributor of certain annuity and life
insurance contracts issued by the Company and its affiliates.
Prior to December 24, 1997, the Company owned 93.6% of the outstanding shares of
MFS. On December 24, 1997, the Company transferred all of its shares of MFS to
Life Holdco in the form of a dividend valued at $159,722,000. As a result of
this transaction, the Company realized a gain of $21,195,000 of undistributed
earnings.
MFS, a registered investment adviser, serves as investment adviser to the mutual
funds in the MFS family of funds as well as certain mutual funds and separate
accounts established by the Company. The MFS Asset Management Group provides
investment advice to substantial private clients.
Sun Life (N.Y.) is engaged in the sale of individual fixed and variable annuity
contracts and group life and disability insurance contracts in the State of New
York.
Sundisco is a registered investment adviser and broker-dealer.
NLT is a federally chartered savings bank.
SLFSL serves as the marketing administrator for the distribution of the offshore
products of Sun Life Assurance Company of Canada (Bermuda), an affiliate.
Sun Capital is a registered investment adviser.
Sunfinco and Sunbesco are currently inactive.
On September 28, 1998 a $500,000 note was issued by SLISL to the Company at a
rate of 6.0%, maturing on September 28, 2002.
A $110,000,000 note was issued to the Company by MFS on February 11, 1998 at an
interest rate of 6.0% due February 11, 1999. Another $110,000,000 note was
issued to the Company by MFS on December 22, 1998 at an interest rate of 5.55%
due February 11, 1999.
59
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
2. INVESTMENTS IN SUBSIDIARIES (CONTINUED)
On December 23, 1997, the Company issued a $110,000,000 note to US Holdco at an
interest rate of 5.80%, which was repaid on March 1, 1998. A $110,000,000 note
was also issued to the Company by MFS on December 23, 1997 at an interest rate
of 5.85% and was repaid on February 11, 1998.
On December 31, 1996, the Company issued a $58,000,000 note to SLOC at an
interest rate of 5.70% which was repaid on February 10, 1997. Also on December
31, 1996, the Company was issued a $58,000,000 note by MFS at an interest rate
of 5.76%. This note was repaid to the Company on February 10, 1997. On December
31, 1998, 1997 and 1996, the Company had an additional $20,000,000 in notes
issued by MFS, scheduled to mature in 2000.
During 1998, 1997, and 1996, the Company contributed capital in the following
amounts to its subsidiaries:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
MCIC -- $ 2,000 $ 10,000
SLFSL $ 750 1,000 1,500
SPE 97-1 -- 20,377 --
Sundisco 10,000 -- --
Sun Capital 500 -- --
Clarendon 10 -- --
SLISL 502 -- --
</TABLE>
Summarized combined financial information of the Company's subsidiaries as of
December 31, 1998, 1997 and 1996 and for the years then ended, follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Intangible assets $ -- $ -- $ 9,646
Other assets 1,315,317 1,190,951 1,376,014
Liabilities (1,186,872) (1,073,966) (1,241,617)
------------- ------------- -------------
Total net assets $ 128,445 $ 116,985 $ 144,043
------------- ------------- -------------
------------- ------------- -------------
Total revenues $ 222,853 $ 750,364 $ 717,280
Operating expenses (221,933) (646,896) (624,199)
Income tax expense (1,222) (43,987) (42,820)
------------- ------------- -------------
Net income (loss) $ (302) $ 59,481 $ 50,261
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
On December 24, 1997, the Company transferred all of its shares of MFS to its
parent, Life Holdco.
60
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
3. BONDS
Investments in debt securities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1998
----------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS (LOSSES) VALUE
------------ ----------- ----------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Long-term bonds:
United States government and government agencies and
authorities $ 140,417 $ 7,635 $ (177) $ 147,875
States, provinces and political subdivisions 16,632 2,219 -- 18,851
Public utilities 397,670 38,740 (238) 436,172
Transportation 197,207 22,481 (18) 219,670
Finance 144,958 12,542 (494) 157,006
All other corporate bonds 866,584 50,814 (6,419) 910,979
------------ ----------- ----------- ------------
Total long-term bonds 1,763,468 134,431 (7,346) 1,890,553
------------ ----------- ----------- ------------
Short-term bonds:
U.S. Treasury Bills, bankers acceptances and commercial
paper 43,400 -- -- 43,400
Affiliates 220,000 -- -- 220,000
------------ ----------- ----------- ------------
Total short-term bonds 263,400 -- -- 263,400
------------ ----------- ----------- ------------
Total bonds $ 2,026,868 $ 134,431 $ (7,346) $ 2,153,953
------------ ----------- ----------- ------------
------------ ----------- ----------- ------------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
----------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS (LOSSES) VALUE
------------ ----------- ----------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Long-term bonds:
United States government and government agencies and
authorities $ 126,923 $ 5,529 $ -- $ 132,452
States, provinces and political subdivisions 22,361 2,095 -- 24,456
Public utilities 398,939 35,338 (91) 434,186
Transportation 214,130 22,000 (390) 235,740
Finance 157,891 5,885 (120) 163,656
All other corporate bonds 990,455 52,678 (5,456) 1,037,677
------------ ----------- ----------- ------------
Total long-term bonds 1,910,699 123,525 (6,057) 2,028,167
------------ ----------- ----------- ------------
Short-term bonds:
U.S. Treasury Bills, bankers acceptances and commercial
paper 431,032 -- -- 431,032
Affiliates 110,000 -- -- 110,000
------------ ----------- ----------- ------------
Total short-term bonds 541,032 -- -- 541,032
------------ ----------- ----------- ------------
Total bonds $ 2,451,731 $ 123,525 $ (6,057) $ 2,569,199
------------ ----------- ----------- ------------
------------ ----------- ----------- ------------
</TABLE>
61
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
3. BONDS (CONTINUED)
The amortized cost and estimated fair value of bonds at December 31, 1998 are
shown below by contractual maturity. Expected maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call and/or prepayment penalties.
<TABLE>
<CAPTION>
DECEMBER 31, 1998
--------------------------
AMORTIZED ESTIMATED
COST FAIR VALUE
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Maturities:
Due in one year or less $ 459,631 $ 460,787
Due after one year through five years 329,625 336,516
Due after five years through ten years 264,372 283,840
Due after ten years 703,341 781,253
------------ ------------
1,756,969 1,862,396
Mortgage-backed securities 269,899 291,557
------------ ------------
Total bonds $ 2,026,868 $ 2,153,953
------------ ------------
------------ ------------
</TABLE>
Proceeds from sales and maturities of investments in debt securities during
1998, 1997, and 1996 were $1,016,811,000, $980,264,000, and $1,554,016,000,
gross gains were $17,025,000, $10,732,000, and $16,975,000 and gross losses were
$866,000, $2,446,000, and $10,885,000, respectively.
Bonds included above with an amortized cost of approximately $2,572,000,
$2,578,000 and $2,060,000 at December 31, 1998, 1997 and 1996, respectively,
were on deposit with governmental authorities as required by law.
Excluding investments in U.S. government and agencies securities, the Company is
not exposed to significant concentration of credit risk in its portfolio.
4. SECURITIES LENDING
The Company has a securities lending program operated on its behalf by the
Company's primary custodian, Chase Manhattan Bank of New York. The custodian has
indemnified the Company against losses arising from this program. There were no
securities out on loan as of December 31, 1998 and 1997. Income resulting from
this program was $94,000, $200,000 and $137,000 for the years ended December 31,
1998, 1997 and 1996, respectively.
5. MORTGAGE LOANS
The Company invests in commercial first mortgage loans throughout the United
States. The Company monitors the condition of the mortgage loans in its
portfolio. In those cases where mortgages have been restructured, appropriate
allowances for losses have been made. In those cases where, in management's
judgment, the mortgage loans' values are impaired, appropriate losses are
recorded.
62
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
5. MORTGAGE LOANS (CONTINUED)
The following table shows the geographical distribution of the mortgage loan
portfolio.
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1998 1997
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
California $ 82,397 $ 119,122
Massachusetts 53,528 58,981
Michigan 34,357 42,912
New York 21,190 45,696
Ohio 36,171 51,862
Pennsylvania 93,587 97,949
Washington 36,548 54,948
All other 177,225 212,565
---------- ----------
$ 535,003 $ 684,035
---------- ----------
---------- ----------
</TABLE>
The Company has restructured mortgage loans totaling $30,743,000 and $26,284,000
at December 31, 1998 and 1997, respectively, against which there are allowances
for losses of $2,120,000 and $3,026,000, respectively.
The Company has made commitments of mortgage loans on real estate into the
future.The outstanding commitments for these mortgages amount to $18,005,000 and
$12,300,000 at December 31, 1998 and 1997, respectively.
6. INVESTMENT GAINS AND LOSSES
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------
1998 1997 1996
---------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Net realized gains (losses):
Bonds $ 5,659 $ 2,882 $ 5,631
Common stock of affiliates -- 21,195 --
Common stocks 48
Mortgage loans 2,374 3,837 763
Real estate 955 2,912 599
Other invested assets (3,827) (717) 567
---------- ---------- ---------
Subtotal 5,209 30,109 7,560
Capital gains tax expense 4,815 3,403 2,698
---------- ---------- ---------
Total $ 394 $ 26,706 $ 4,862
---------- ---------- ---------
---------- ---------- ---------
Changes in unrealized gains (losses):
Common stock of affiliates $ (302) $ (2,894) $ (5,739)
Mortgage loans (1,312) 1,524 (600)
Real estate 403 3,377 4,624
Other invested assets 827 (855) --
---------- ---------- ---------
Total $ (384) $ 1,152 $ (1,715)
---------- ---------- ---------
---------- ---------- ---------
</TABLE>
63
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
6. INVESTMENT GAINS AND LOSSES (CONTINUED)
Realized capital gains and losses on bonds and mortgages and interest rate swaps
which relate to changes in levels of interest rates are charged or credited to
an interest maintenance reserve ("IMR") and amortized into income over the
remaining contractual life of the security sold. The net realized capital gains
credited to the interest maintenance reserve were $8,943,000 in 1998, $6,321,000
in 1997, and $7,710,000 in 1996. All gains and losses are transferred net of
applicable income taxes.
7. NET INVESTMENT INCOME
Net investment income consisted of:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1998 1997 1996
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Interest income from bonds $ 167,436 $ 188,924 $ 178,695
Income from investment in common stock of affiliates 3,675 41,181 50,408
Interest income from mortgage loans 53,269 76,073 92,591
Real estate investment income 15,932 17,161 16,249
Interest income from policy loans 2,881 3,582 2,790
Other investment income (loss) (641) (193) 1,710
---------- ---------- ----------
Gross investment income 242,552 326,728 342,443
---------- ---------- ----------
Interest on surplus notes and notes payable (44,903) (42,481) (23,061)
Investment expenses (13,117) (13,998) (15,629)
---------- ---------- ----------
Net investment income $ 184,532 $ 270,249 $ 303,753
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
8. DERIVATIVES
The Company uses derivative instruments for interest rate risk management
purposes, including hedges against specific interest rate risk and to minimize
the Company's exposure to fluctuations in interest rates. The Company's use of
derivatives has included U.S. Treasury futures, conventional interest rate
swaps, and forward spread lock interest rate swaps.
In the case of interest rate futures, gains or losses on contracts that qualify
as hedges are deferred until the earliest of the completion of the hedging
transaction, determination that the transaction will no longer take place, or
determination that the hedge is no longer effective. Upon completion of the
hedge, where it is impractical to allocate gains or losses to specific hedged
assets or liabilities, gains or losses are deferred in IMR and amortized over
the remaining life of the hedged assets. At December 31, 1998 and 1997 there
were no futures contracts outstanding.
In the case of interest rate and foreign currency swap agreements and forward
spread lock interest rate swap agreements, gains or losses on terminated swaps
are deferred in the IMR and amortized over the shorter of the remaining life of
the hedged asset sold or the remaining term of the swap contract. The net
differential to be paid or received on interest rate swaps is recorded monthly
as interest rates change.
64
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
8. DERIVATIVES (CONTINUED)
Options are used to hedge the stock market interest exposure in the mortality
and expense risk charges and guaranteed minimum death benefit features of the
Company's variable annuities. The Company's open positions are as follows:
<TABLE>
<CAPTION>
SWAPS OUTSTANDING
AT DECEMBER 31, 1998
---------------------------------
NOTIONAL MARKET VALUE
PRINCIPAL AMOUNTS OF POSITIONS
------------------ -------------
(IN THOUSANDS)
<S> <C> <C>
Conventional interest rate swaps $ 45,000 $ 508
Foreign currency swap 1,178 263
</TABLE>
<TABLE>
<CAPTION>
SWAPS OUTSTANDING
AT DECEMBER 31, 1997
---------------------------------
NOTIONAL MARKET VALUE
PRINCIPAL AMOUNTS OF POSITIONS
------------------ -------------
(IN THOUSANDS)
<S> <C> <C>
Conventional interest rate swaps $ 80,000 $ (2,891)
Foreign currency swap 1,700 208
Forward spread lock swaps 50,000 274
Asian Put Option S & P 500 75,000 693
</TABLE>
The market value of swaps is the estimated amount that the Company would receive
or pay on termination or sale, taking into account current interest rates and
the current credit worthiness of the counterparties. The Company is exposed to
potential credit loss in the event of nonperformance by counterparties. The
counterparties are major financial institutions and management believes that the
risk of incurring losses related to credit risk is remote.
9. LEVERAGED LEASES
The Company is a lessor in a leveraged lease agreement entered into on October
21, 1994, under which equipment having an estimated economic life of 25-40 years
was leased for a term of 9.75 years. The Company's equity investment represented
22.9% of the purchase price of the equipment. The balance of the purchase price
was furnished by third-party long-term debt financing, collateralized by the
equipment and non-recourse to the Company. At the end of the lease term, the
Master Lessee may exercise a fixed price purchase option to purchase the
equipment.
65
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
9. LEVERAGED LEASES (CONTINUED)
The Company's net investment in leveraged leases is composed of the following
elements:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1998 1997
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Lease contracts receivable $ 78,937 $ 92,605
Less non-recourse debt (78,920) (92,589)
---------- ----------
17 16
Estimated residual value of leased assets 41,150 41,150
Less unearned and deferred income (8,932) (10,324)
---------- ----------
Investment in leveraged leases 32,235 30,842
Less fees (138) (163)
---------- ----------
Net investment in leveraged leases $ 32,097 $ 30,679
---------- ----------
---------- ----------
</TABLE>
The net investment is included in "other invested assets" on the balance sheet.
10. REINSURANCE
The Company has agreements with SLOC which provide that SLOC will reinsure the
mortality risks of the individual life insurance contracts sold by the Company.
Under these agreements basic death benefits and supplementary benefits are
reinsured on a yearly renewable term basis and coinsurance basis, respectively.
Reinsurance transactions under these agreements had the effect of decreasing
income from operations by approximately $2,128,000, $1,381,000 and $1,603,000
for the years ended December 31, 1998, 1997 and 1996, respectively.
Effective January 1, 1991, the Company entered into an agreement with SLOC under
which certain individual life insurance contracts issued by SLOC were reinsured
by the Company on a 90% coinsurance basis. During 1997 SLOC changed certain
assumptions used in determining the gross and the ceded reserve balance. The
Company reflected the effect of the changes in assumptions to its assumed
reserves as a direct credit to surplus. The effect of the change was a
$39,016,000 decrease in reserves. Also, the agreement required SLOC to reinsure
the mortality risks in excess of $500,000 per policy for the individual life
insurance contracts assumed by the Company. Such death benefits are reinsured on
a yearly renewable term basis. The life reinsurance assumed agreement required
the reinsurer to withhold funds in amounts equal to the reserves assumed. These
agreements had the effect of increasing income from operations by approximately
$24,579,000, $37,050,000 and $35,161,000 for the years ended December 31, 1998,
1997 and 1996, respectively. The Company terminated this agreement effective
October 1, 1998, resulting in an increase in income from operations of
$65,679,000 which included a cash settlement.
66
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
10. REINSURANCE (CONTINUED)
The following are summarized pro-forma results of operations of the Company for
the years ended December 31, 1998, 1997 and 1996 before the effect of
reinsurance transactions with SLOC:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
1998 1997 1996
------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Income:
Premiums, annuity deposits and other revenues $ 2,377,364 $ 2,340,733 $ 1,941,423
Net investment income and realized gains 187,208 298,120 310,172
------------ ------------ ------------
Subtotal 2,564,572 2,638,853 2,251,595
------------ ------------ ------------
Benefits and Expenses:
Policyholder benefits 2,312,247 2,350,354 2,011,998
Other expenses 203,238 187,591 155,531
------------ ------------ ------------
Subtotal 2,515,485 2,537,945 2,167,529
------------ ------------ ------------
Income from operations $ 49,087 $ 100,908 $ 84,066
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
The Company has an agreement with an unrelated company which provides
reinsurance of certain individual life insurance contracts on a modified
coinsurance basis and under which all deficiency reserves related to these
contracts are reinsured. Reinsurance transactions under this agreement had the
effect of increasing income from operations by $3,008,000 in 1998, and
decreasing income from operations by $2,658,000 in 1997 and $46,000 in 1996.
67
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
11. WITHDRAWAL CHARACTERISTICS OF ANNUITY ACTUARIAL RESERVES AND DEPOSIT
LIABILITIES
The withdrawal characteristics of general account and separate account annuity
reserves and deposits are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1998
-----------------------------
AMOUNT % OF TOTAL
------------- --------------
(IN THOUSANDS)
<S> <C> <C>
Subject to discretionary withdrawal-with adjustment:
With market value adjustment $ 2,896,529 19
At book value less surrender charges (surrender charge >5%) 10,227,212 66
At book value (minimal or no charge or adjustment) 1,264,453 8
Not subject to discretionary withdrawal provision 1,106,197 7
------------- ---
Total annuity actuarial reserves and deposit liabilities $ 15,494,391 100
------------- ---
------------- ---
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------------------
AMOUNT % OF TOTAL
------------- --------------
(IN THOUSANDS)
<S> <C> <C>
Subject to discretionary withdrawal-with adjustment:
With market value adjustment $ 3,415,394 25
At book value less surrender charges (surrender charge >5%) 7,672,211 57
At book value (minimal or no charge or adjustment) 1,259,698 9
Not subject to discretionary withdrawal provision 1,164,651 9
------------- ---
Total annuity actuarial reserves and deposit liabilities $ 13,511,954 100
------------- ---
------------- ---
</TABLE>
12. SEGMENT INFORMATION
The Company offers financial products and services such as fixed and variable
annuities, retirement plan services and life insurance on an individual basis.
Within these areas, the Company conducts business principally in two operating
segments and maintains a corporate segment to provide for the capital needs of
the various operating segments and to engage in other financing related
activities.
The Individual Insurance segment markets and administers a variety of life
insurance products sold to individuals and corporate owners of individual life
insurance. The products include whole life, universal life and variable life
products.
The Retirement Products and Services ("RPS") segment markets and administers
individual and group variable annuity products, individual and group fixed
annuity products which include market value adjusted annuities, and other
retirement benefit products.
68
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
12. SEGMENT INFORMATION (CONTINUED)
The following amounts pertain to the various business segments:
<TABLE>
<CAPTION>
FEDERAL
TOTAL TOTAL PRETAX INCOME TOTAL
(IN THOUSANDS) REVENUES EXPENDITURES* INCOME TAXES ASSETS
- ----------------------------------------------------- ------------ -------------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C>
1998
Individual Insurance $ 229,710 $ 144,800 $ 84,910 $ (4,148) $ 199,683
RPS 2,527,608 2,483,715 43,893 12,486 16,123,905
Corporate 10,959 3,042 7,917 3,375 579,033
------------ -------------- ---------- ---------- -------------
Total $ 2,768,277 $ 2,631,557 $ 136,720 $ 11,713 $ 16,902,621
------------ -------------- ---------- ---------- -------------
1997
Individual Insurance 304,141 272,333 31,808 13,825 1,143,697
RPS 2,533,006 2,507,591 25,414 10,667 14,043,221
Corporate 57,897 5,244 52,653 (17,153) 738,439
------------ -------------- ---------- ---------- -------------
Total $ 2,895,044 $ 2,785,169 $ 109,875 $ 7,339 $ 15,925,357
------------ -------------- ---------- ---------- -------------
1996
Individual Insurance 281,309 255,846 25,463 13,931 817,115
RPS 2,174,602 2,151,126 23,476 1,203 12,057,572
Corporate 64,721 898 63,823 (20,534) 689,266
------------ -------------- ---------- ---------- -------------
Total $ 2,520,632 $ 2,407,870 $ 112,762 $ (5,400) $ 13,563,953
------------ -------------- ---------- ---------- -------------
</TABLE>
- ------------------------
* Total expenditures include dividends to policyholders of $(5,981) for 1998,
$33,316 for 1997 and $29,189 for 1996.
13. RETIREMENT PLANS
The Company participates with SLOC in a noncontributory defined benefit pension
plan covering essentially all employees. The benefits are based on years of
service and compensation.
The funding policy for the pension plan is to contribute an amount which at
least satisfies the minimum amount required by ERISA; currently, the plan is
fully funded. The Company is charged for its share of the pension cost based
upon its covered participants. Pension plan assets consist principally of
separate accounts of SLOC.
The Company's share of the group's accrued pension cost was $1,178,000 and
$593,000 at December 31, 1998 and 1997, respectively. The Company's share of net
periodic pension cost was $586,000, $146,000 and $27,000, for 1998, 1997 and
1996, respectively.
The Company also participates with SLOC and certain affiliates in a 401(k)
savings plan for which substantially all employees are eligible. The Company
matches, up to specified amounts, employees' contributions to the plan. Company
contributions were $231,000, $259,000 and $233,000 for the years ended December
31, 1998, 1997 and 1996, respectively.
OTHER POST-RETIREMENT BENEFIT PLANS
In addition to pension benefits the Company provides certain health, dental, and
life insurance benefits ("post-retirement benefits") for retired employees and
dependents. Substantially all employees may become eligible for these benefits
if they reach normal retirement age while working for the Company, or retire
early upon satisfying an alternate age plus service condition. Life insurance
benefits are generally set at a fixed amount.
69
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
13. RETIREMENT PLANS (CONTINUED)
Effective January 1, 1993, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 106, "Employer's Accounting for Postretirement Benefits
Other Than Pensions." SFAS No. 106 requires an accrual of the estimated cost of
retiree benefit payments during the years the employee provides services. SFAS
No. 106 allows recognition of the cumulative effect of the liability in the year
of adoption or the amortization of the obligation over a period of up to 20
years. The obligation of approximately $455,000 is recognized over a period of
ten years. The Company's cash flows are not affected by implementation of this
standard, but implementation decreased net income by $95,000, $117,000, and
$8,000 for the years ended December 31, 1998, 1997, and 1996, respectively. The
Company's post retirement health, dental and life insurance benefits currently
are not funded.
OTHER POST-RETIREMENT BENEFIT PLANS CONTINUED
The following table sets forth the change in the pension and other
postretirement benefit plans' benefit obligations and assets as well as the
plans' funded status reconciled with the amount shown in the Company's financial
statements at December 31:
<TABLE>
<CAPTION>
PENSION BENEFITS OTHER BENEFITS
1998 1997 1998 1997
---------- ---------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Change in benefit obligation:
Benefit obligation at beginning of year $ 79,684 $ 70,848 $ 9,845 $ 9,899
Service cost 4,506 4,251 240 306
Interest cost 6,452 5,266 673 725
Amendments -- 1,000 -- --
Actuarial loss (gain) 21,975 -- 308 (801)
Benefits paid (1,825) (1,681) (647) (284)
---------- ---------- ---------- ---------
Benefit obligation at end of year $ 110,792 $ 79,684 $ 10,419 $ 9,845
---------- ---------- ---------- ---------
---------- ---------- ---------- ---------
The Company's share:
Benefit obligation at beginning of year $ 5,094 $ 4,529 $ 385 $ 384
Benefit obligation at end of year $ 9,125 $ 5,094 $ 416 $ 385
Change in plan assets:
Fair value of plan assets at beginning of year $ 136,610 $ 122,807 $ -- $ --
Actual return on plan assets 16,790 15,484 -- --
Employer contribution -- -- 647 284
Benefits paid (1,825) (1,681) (647) (284)
---------- ---------- ---------- ---------
Fair value of plan assets at end of year $ 151,575 $ 136,610 $ -- $ --
---------- ---------- ---------- ---------
---------- ---------- ---------- ---------
Funded status $ 40,783 $ 56,926 $ (10,419) $ (9,845)
Unrecognized net actuarial gain (loss) (2,113) (18,147) 586 257
Unrecognized transition obligation (asset) (24,674) (26,730) 185 230
Unrecognized prior service cost 7,661 8,241 -- --
---------- ---------- ---------- ---------
Prepaid (accrued) benefit cost $ 21,657 $ 20,290 $ (9,648) $ (9,358)
---------- ---------- ---------- ---------
---------- ---------- ---------- ---------
The Company's share of accrued benefit cost $ (1,178) $ (593) $ (195) $ (102)
Weighted-average assumptions as of December 31:
Discount rate 6.75% 7.50% 6.75% 7.50%
Expected return on plan assets 8.00% 7.50% N/A N/A
Rate of compensation increase 4.50% 4.50% N/A N/A
</TABLE>
70
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
13. RETIREMENT PLANS (CONTINUED)
For measurement purposes, a 10.1% annual rate of increase in the per capita cost
of covered health care benefits was assumed for 1998 (5.7% for dental benefits).
The rates were assumed to decrease gradually to 5% for 2005 and remain at that
level thereafter.
<TABLE>
<CAPTION>
1998 1997 1998 1997
---------- --------- --------- ---------
<S> <C> <C> <C> <C>
Components of net periodic benefit cost:
Service cost $ 4,506 $ 4,251 $ 240 $ 306
Interest cost 6,452 5,266 673 725
Expected return on plan assets (10,172) (9,163) -- --
Amortization of transition obligation (asset) (2,056) (2,056) 45 45
Amortization of prior service cost 580 517 -- --
Recognized net actuarial (gain) loss (677) (789) (20) 71
---------- --------- --------- ---------
Net periodic benefit cost $ (1,367) $ (1,974) $ 938 $ 1,147
---------- --------- --------- ---------
---------- --------- --------- ---------
The Company's share of net periodic benefit cost $ 586 $ 146 $ 95 $ 117
---------- --------- --------- ---------
---------- --------- --------- ---------
</TABLE>
Assumed health care cost trend rates have a significant effect on the amounts
reported for the health care plans. A one-percentage-point change in assumed
health care cost trend rates would have the following effects:
<TABLE>
<CAPTION>
1-PERCENTAGE-POINT 1-PERCENTAGE-POINT
INCREASE DECREASE
------------------- -------------------
(IN THOUSANDS)
<S> <C> <C>
Effect on total of service and interest cost components $ 210 $ (170)
Effect on postretirement benefit obligation 2,026 (1,697)
</TABLE>
71
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the carrying amounts and estimated fair values of
the Company's financial instruments at December 31, 1998 and 1997:
<TABLE>
<CAPTION>
DECEMBER 31, 1998
---------------------------------------
CARRYING AMOUNT ESTIMATED FAIR VALUE
----------------- --------------------
(IN THOUSANDS)
<S> <C> <C>
ASSETS:
Bonds $ 2,026,868 $ 2,153,953
Mortgages 535,003 556,143
Derivatives -- 771
LIABILITIES:
Insurance reserves $ 121,100 $ 121,100
Individual annuities 274,448 271,849
Pension products 1,104,489 1,145,351
<CAPTION>
DECEMBER 31, 1997
---------------------------------------
CARRYING AMOUNT ESTIMATED FAIR VALUE
----------------- --------------------
(IN THOUSANDS)
<S> <C> <C>
ASSETS:
Bonds $ 2,451,731 $ 2,569,199
Mortgages 684,035 706,975
LIABILITIES:
Insurance reserves $ 123,128 $ 123,128
Individual annuities 307,668 302,165
Pension products 1,527,433 1,561,108
Derivatives -- (1,716)
</TABLE>
The major methods and assumptions used in estimating the fair values of
financial instruments are as follows:
The fair values of short-term bonds are estimated to be the amortized cost. The
fair values of long-term bonds which are publicly traded are based upon market
prices or dealer quotes. For privately placed bonds, fair values are estimated
by taking into account prices for publicly traded bonds of similar credit risk
and maturity and repayment and liquidity characteristics.
The fair values of the Company's general account insurance reserves and
liabilities under investment-type contracts (insurance, annuity and pension
contracts that do not involve mortality or morbidity risks) are estimated using
discounted cash flow analyses or surrender values. Those contracts that are
deemed to have short-term guarantees have a carrying amount equal to the
estimated market value.
The fair values of mortgages are estimated by discounting future cash flows
using current rates at which similar loans would be made to borrowers with
similar credit ratings and for the same remaining maturities.
The fair values of derivative financial instruments are estimated using the
process described in Note 8.
72
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
15. STATUTORY INVESTMENT VALUATION RESERVES
The asset valuation reserve ("AVR") provides a reserve for losses from
investments in bonds, stocks, mortgage loans, real estate and other invested
assets with related increases or decreases being recorded directly to surplus.
Realized capital gains and losses on bonds and mortgages which relate to changes
in levels of interest rates are charged or credited to an interest maintenance
reserve ("IMR") and amortized into income over the remaining contractual life of
the security sold.
The table shown below presents changes in the major elements of the AVR and IMR.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1998 1997
-------------------- --------------------
AVR IMR AVR IMR
--------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Balance, beginning of year $ 47,605 $ 33,830 $ 53,911 $ 28,675
Net realized investment gains, net of tax 256 8,942 17,400 6,321
Amortization of net investment gains -- (2,282) -- (1,166)
Unrealized investment losses (6,550) -- (2,340) --
Required by formula 3,081 -- (21,366) --
--------- --------- --------- ---------
Balance, end of year $ 44,392 $ 40,490 $ 47,605 $ 33,830
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
16. FEDERAL INCOME TAXES
The Company and its subsidiaries file a consolidated federal income tax return.
Federal income taxes are calculated for the consolidated group based upon
amounts determined to be payable as a result of operations within the current
year. No provision is recognized for timing differences which may exist between
financial statement and taxable income. Such timing differences include
reserves, depreciation and accrual of market discount on bonds. Cash payments
for federal income taxes were approximately $48,144,000, $31,000,000 and
$19,264,000 for the years ended December 31, 1998, 1997 and 1996, respectively.
The Company is currently undergoing an audit by the Internal Revenue Service.
The Company believes that there will be no material audit adjustments for the
periods under examination.
17. SURPLUS NOTES AND NOTES RECEIVABLE (PAYABLE)
On December 22, 1997, the Company issued a $250,000,000 surplus note to Life
Holdco. This note has an interest rate of 8.625% and is due on or after November
6, 2027.
On May 9, 1997, the Company issued a short-term note of $600,000,000 to Life
Holdco at an interest rate of 5.10%, which was extended at various interest
rates. This note was repaid on December 22, 1997.
On December 19, 1995, the Company issued surplus notes totaling $315,000,000 to
an affiliate, Sun Canada Financial Co., at interest rates between 5.75% and
7.25%. Of these notes, $157,500,000 will mature in the year 2007 and
$157,500,000 will mature in the year 2015. Interest on these notes is payable
semiannually.
Principal and interest on surplus notes are payable only to the extent that the
Company meets specified requirements regarding free surplus exclusive of the
principal amount and accrued interest, if any, on these notes and with the
consent of the Delaware Insurance Commissioner.
73
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
17. SURPLUS NOTES AND NOTES RECEIVABLE (PAYABLE) (CONTINUED)
The Company accrued $4,259,000 and $ 964,000 for interest on surplus notes for
the years ended December 31, 1998 and 1997, respectively.
The Company accrued $4,259,000 and $964,000 for interest on surplus notes for
the years ended December 31, 1998 and 1997, respectively.
The Company expensed $44,903,000, $42,481,000 and $23,061,000 for interest on
surplus notes and notes payable for the years ended December 31, 1998, 1997 and
1996, respectively.
18. TRANSACTIONS WITH AFFILIATES
The Company has an agreement with SLOC which provides that SLOC will furnish, as
requested, personnel as well as certain services and facilities on a
cost-reimbursement basis. Expenses under this agreement amounted to
approximately $16,344,000 in 1998, $15,997,000 in 1997, and $20,192,000 in 1996.
The Company leases office space to SLOC under lease agreements with terms
expiring in September, 1999 and options to extend the terms for each of thirteen
successive five-year terms at fair market rental not to exceed 125% of the fixed
rent for the term which is ending. Rent received by the Company under the leases
for 1998 amounted to approximately $6,856,000.
19. RISK-BASED CAPITAL
Effective December 31, 1993, the NAIC adopted risk-based capital requirements
for life insurance companies. The risk-based capital requirements provide a
method for measuring the minimum acceptable amount of adjusted capital that a
life insurer should have, as determined under statutory accounting practices,
taking into account the risk characteristics of its investments and products.
The Company has met the minimum risk-based capital requirements at December 31,
1998, 1997 and 1996.
20. ACCOUNTING POLICIES AND PRINCIPLES
The financial statements of the Company have been prepared on the basis of
statutory accounting practices which, prior to 1996, were considered by the
insurance industry and the accounting profession to be in accordance with GAAP
for mutual life insurance companies. The primary differences between statutory
accounting practices and GAAP are described as follows. Under statutory
accounting practices, financial statements are not consolidated and investments
in subsidiaries are shown at net equity value. Accordingly, the assets,
liabilities and results of operations of the Company's subsidiaries are not
consolidated with the assets, liabilities and results of operations,
respectively, of the Company. Changes in net equity value of the common stock of
the Company's United States life insurance subsidiaries are directly reflected
in the Company's surplus. Changes in the net equity value of the common stock of
all other subsidiaries are directly reflected in the Company's Asset Valuation
Reserve. Dividends paid by subsidiaries to the Company are included in the
Company's net investment income.
Other differences between statutory accounting practices and GAAP include the
following: statutory accounting practices do not recognize the following assets
or liabilities which are reflected under GAAP: deferred policy acquisition
costs, deferred federal income taxes and statutory nonadmitted assets. Asset
Valuation Reserves and Interest Maintenance Reserves are established under
statutory accounting practices but not under GAAP. Methods for calculating real
estate depreciation and investment valuation allowances differ under statutory
accounting practices and GAAP. Actuarial assumptions and reserving methods
differ under statutory accounting practices and GAAP. Premiums for universal
74
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
20. ACCOUNTING POLICIES AND PRINCIPLES (CONTINUED)
life and investment-type products are recognized as income for statutory
purposes and as deposits to policyholders' accounts for GAAP.
Because the Company's management uses financial information prepared in
conformity with accounting principles generally accepted in Canada in the normal
course of business, the management of Sun Life Assurance Company of Canada
(U.S.) has determined that the cost of complying with Statement No. 120,
"Accounting and Reporting by Mutual Insurance Enterprises and by Insurance
Enterprises for Certain Long Duration Participating Contracts", exceeds the
benefits that the Company, or the users of its financial statements, would
experience. Consequently, the Company has elected not to apply such standards in
the preparation of these financial statements.
75
<PAGE>
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
We have audited the accompanying statutory statements of admitted assets,
liabilities and capital stock and surplus of Sun Life Assurance Company of
Canada (U.S.) (the "Company") as of December 31, 1998 and 1997, and the related
statutory statements of operations, changes in capital stock and surplus, and
cash flow for each of the three years in the period ended December 31, 1998.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As described more fully in Notes 1 and 20 to the financial statements, the
Company prepared these financial statements using accounting practices
prescribed or permitted by the Insurance Department of the State of Delaware,
which is a comprehensive basis of accounting other than generally accepted
accounting principles. The effects on the financial statements of the
differences between the statutory basis of accounting and generally accepted
accounting principles, although not reasonably determinable, are presumed to be
material.
In our opinion, the statutory financial statements referred to above present
fairly, in all material respects, the admitted assets, liabilities, and capital
stock and surplus of Sun Life Assurance Company of Canada (U.S.) as of December
31, 1998 and 1997, and the results of its operations and its cash flow for each
of the three years in the period ended December 31, 1998 on the basis of
accounting described in Notes 1 and 20.
However, because of the differences between the two bases of accounting referred
to in the second preceding paragraph, in our opinion, the statutory financial
statements referred to above do not present fairly, in conformity with generally
accepted accounting principles, the financial position of Sun Life Assurance
Company of Canada (U.S.) as of December 31, 1998 and 1997 or the results of its
operations or its cash flow for each of the three years in the period ended
December 31, 1998.
As management has stated in Note 20, because the Company's management uses
financial information prepared in accordance with accounting principles
generally accepted in Canada in the normal course of business, the management of
Sun Life Assurance Company of Canada (U.S.) has determined that the cost of
complying with Statement No. 120, ACCOUNTING AND REPORTING BY MUTUAL LIFE
INSURANCE ENTERPRISES AND BY INSURANCE ENTERPRISES FOR CERTAIN LONG-DURATION
PARTICIPATING CONTRACTS, would exceed the benefits that the Company, or the
users of its financial statements, would experience. Consequently, the Company
has elected not to apply such standards in the preparation of these financial
statements.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
February 5, 1999
76
<PAGE>
TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION
<TABLE>
<S> <C>
Calculation of Performance Data -- Average Annual Total Return.......................
Non-Standardized Investment Performance..............................................
Advertising and Sales Literature.....................................................
Calculations.........................................................................
Example of Variable Accumulation Unit Value Calculation............................
Example of Variable Annuity Unit Calculation.......................................
Example of Variable Annuity Payment Calculation....................................
Calculation of Annuity Unit Values.................................................
Distribution of the Contracts........................................................
Designation and Change of Beneficiary................................................
Custodian............................................................................
Financial Statements.................................................................
</TABLE>
77
<PAGE>
This Prospectus sets forth information about the Contracts and the
Variable Account that a prospective purchaser should know before investing.
Additional information about the Contracts and the Variable Account has been
filed with the Securities and Exchange Commission in a Statement of Additional
Information dated May 1, 1999 which is incorporated herein by reference. The
Statement of Additional Information is available upon request and without charge
from Sun Life Assurance Company of Canada (U.S.). To receive a copy, return this
request form to the address shown below or telephone (617) 348-9600 or (800)
752-7215.
- --------------------------------------------------------------------------------
To: Sun Life Assurance Company of Canada (U.S.)
Annuity Service Mailing Address:
c/o Retirement Products and Services
P.O. Box 1024
Boston, Massachusetts 02103
Please send me a Statement of Additional Information for
MFS Regatta Gold Variable and Fixed Annuity
Sun Life of Canada (U.S.) Variable Account F.
Name
- --------------------------------------------------------------
Address
- --------------------------------------------------------------
-------------------------------------------------------------------------
City
- ------------------------------------ State
- -------------- Zip
- -------
Telephone
- ----------------------------------------------------------------
78
<PAGE>
APPENDIX A
GLOSSARY
The following terms as used in this Prospectus have the indicated
meanings:
ACCOUNT OR PARTICIPANT ACCOUNT: An account established for each
Participant to which Net Purchase Payments are credited.
ACCOUNT VALUE: The Variable Accumulation Value, if any, plus the Fixed
Accumulation Value, if any, of your Account for any Valuation Period.
ACCOUNT YEAR AND ACCOUNT ANNIVERSARY: Your first Account Year is the
period of (a) 12 full calendar months plus (b) the part of the calendar month in
which we issue your Contract (if not on the first day of the month), beginning
with the Contract Date. Your Account Anniversary is the first day immediately
after the end of an Account Year. Each Account Year after the first is the 12
calendar month period that begins on your Account Anniversary. If, for example,
the Contract Date is in March, the first Account Year will be determined from
the Contract Date but will end on the last day of March in the following year;
your Account Anniversary is April 1 and all Account Years after the first will
be measured from April 1.
ACCUMULATION PHASE: The period before the Annuity Commencement Date and
during the lifetime of the Annuitant during which you make Purchase Payments
under the Contract. This is called the "Accumulation Period" in the Contract.
ANNUITANT: The person or persons named in the Application and whose life
the first annuity payment is to be made. In a Non-Qualified Contract, if you
name someone other than yourself as Annuitant, you may also name a co-annuitant.
If you do, all provisions of the Contract based on the death of the Annuitant
will be based on the date of death of the last surviving of the persons named.
By example, if the Annuitant dies prior to the Annuity Commencement Date, the
co-annuitant will become the new annuitant. The death benefit will become due
only on the death before the Annuity Commencement Date of the last surviving
annuitant and co-annuitant named. These persons are referred to collectively in
the Contract as "Annuitants." If you have not named a sole Annuitant on the 30th
day before the Annuity Commencement Date and both the Annuitant and Co-Annuitant
are living, the Co-Annuitant will be the sole Annuitant during the Income Phase.
*ANNUITY COMMENCEMENT DATE: The date on which the first annuity payment
under each Contract is to be made.
*ANNUITY OPTION: The method you choose for making annuity payments.
ANNUITY UNIT: A unit of measure used in the calculation of the amount of
the second and each subsequent variable annuity payment from the Variable
Account.
APPLICATION: The document signed by you or other evidence acceptable to us
that serves as your application for participation under a Group Contract.
*BENEFICIARY: The person or entity having the right to receive the death
benefit and, for Non-Qualified Contracts, who is the "designated beneficiary"
for purposes of Section 72(s) of the Internal Revenue Code.
BUSINESS DAY: Any day the New York Stock Exchange is open for trading.
CERTIFICATE: The document for each Participant which evidences the
coverage of the Participant under a Group Contract.
COMPANY: Sun Life Assurance Company of Canada (U.S.).
CONTRACT DATE: The date on which we issue your Contract. This is called
the "Date of Coverage" in the Contract.
* You specify these items on the Contract Specifications page or Certificate
Specifications page, and may change them, as we describe in this Prospectus.
79
<PAGE>
DEATH BENEFIT DATE: If you have elected a death benefit payment option
before the Annuitant's death that remains in effect, the date on which we
receive Due Proof of Death. If your Beneficiary elects the death benefit payment
option, the later of (a) the date on which we receive the Beneficiary's election
and (b) the date on which we receive Due Proof of Death. If we do not receive
the Beneficiary's election within 60 days after we receive Due Proof of Death,
the Death Benefit Date will be the last day of the 60 day period and we will pay
the death benefit in cash.
DUE PROOF OF DEATH: An original certified copy of an official death
certificate, an original certified copy of a decree of a court of competent
jurisdiction as to the finding of death, or any other proof satisfactory to the
Company.
EXPIRATION DATE: The last day of Guarantee Period.
FIXED ACCOUNT: The general account of the Company, consisting of all
assets of the Company other than those allocated to a separate account of the
Company.
FIXED ACCOUNT VALUE: The value of that portion of your Account allocated
to the Fixed Account.
FIXED ANNUITY: An annuity with payments which do not vary as to dollar
amount.
GROUP CONTRACT: A Contract issued by the Company on a group basis.
GUARANTEE AMOUNT: Each separate allocation of Account Value to a
particular Guarantee Period (including interest earned thereon).
GUARANTEE PERIOD: The period for which a Guaranteed Interest Rate is
credited.
GUARANTEED INTEREST RATE: The rate of interest we credit on a compound
annual basis during any Guarantee Period.
INCOME PHASE: The period on and after the Annuity Commencement Date and
during the lifetime of the Annuitant during which we make annuity payments under
the Contract.
NET INVESTMENT FACTOR: An index applied to measure the investment
performance of a Sun-Account from one Valuation Period to the next. The Net
Investment Factor may be greater or less than or equal to one.
NET PURCHASE PAYMENT: The portion of a Purchase Payment which remains
after the deduction of any applicable premium tax or similar tax.
NON-QUALIFIED CONTRACT: A Contract used in connection with a retirement
plan that does not receive favorable federal income tax treatment under Sections
401, 403, 408, or 408A of the Internal Revenue Code. The Participant's interest
in the Contract must be owned by a natural person or agent for a natural person
for the Contract to receive income tax treatment as an annuity.
OWNER: The person, persons or entity entitled to the ownership rights
stated in a Group Contract and in whose name or names the Group Contract is
issued. The Owner may designate a trustee or custodian of a retirement plan
which meets the requirements of Section 401, Section 408(c), Section 408(k),
Section 408(p) or Section 408A of the Internal Revenue Code to serve as legal
owner of assets of a retirement plan, but the term "Owner," as used herein,
shall refer to the organization entering into the Group Contract.
PARTICIPANT: The person named in the Certificate who is entitled to
exercise all rights and privileges of ownership under the Certificate, except as
reserved by the Owner.
PAYEE: A recipient of payments under a Contract. The term includes an
Annuitant or a Beneficiary who becomes entitled to benefits upon the death of
the Participant.
PURCHASE PAYMENT (PAYMENT): An amount paid to the Company as consideration
for the benefits provided by a Contract.
80
<PAGE>
QUALIFIED CONTRACT: A Contract used in connection with a retirement plan
which may receive favorable federal income tax treatment under Sections 401,
403, 408 or 408A of the Internal Revenue Code of 1986, as amended.
SEVEN-YEAR ANNIVERSARY: The seventh Account Anniversary and each
succeeding Account Anniversary occurring at any seven year interval thereafter;
for example, the 14th, 21st and 28th Account Anniversaries.
SUB-ACCOUNT: That portion of the Variable Account which invests in shares
of a specific series of the Series Fund.
VALUATION PERIOD: The period of time from one determination of Variable
Accumulation Unit or Annuity Unit values to the next subsequent determination of
these values. Value determinations are made as of the close of the New York
Stock Exchange on each day that the Exchange is open for trading.
VARIABLE ACCOUNT: Variable Account F of the Company, which is a separate
account of the Company consisting of assets set aside by the Company, the
investment performance of which is kept separate from that of the general assets
of the Company.
VARIABLE ACCUMULATION UNIT: A unit of measure used in the calculation of
Variable Account Value.
VARIABLE ACCOUNT VALUE: The value of that portion of your Account
allocated to the Variable Account.
VARIABLE ANNUITY: An annuity with payments which vary as to dollar amount
in relation to the investment performance of the Variable Account.
81
<PAGE>
APPENDIX B
CONDENSED FINANCIAL INFORMATION--ACCUMULATION UNIT VALUES
The following information should be read in conjunction with the Variable
Account's financial statements appearing elsewhere in this Prospectus, all of
which has been audited by Deloitte & Touche LLP, independent certified public
accountants.
<TABLE>
<CAPTION>
YEAR ENDED
PERIOD ENDED DECEMBER 31,
DECEMBER 31, ------------------------------------------------------------------------------------
1991* 1992 1993 1994 1995 1996 1997
------------ ---------- ------------- ----------- ------------- ------------- -----------
BOND SERIES
<S> <C> <C> <C> <C> <C> <C> <C>
Unit Value:
Beginning of
Period............. -- -- -- -- -- -- --
End of Period........ -- -- -- -- -- -- --
Units outstanding end
of period............ -- -- -- -- -- -- --
CAPITAL APPRECIATION SERIES
Unit Value:
Beginning of
period............. $10.0000 $ 11.5021 $ 12.8402 $ 14.9429 $ 14.2064 $ 18.8932 $ 22.5700
End of period........ $11.5021 $ 12.8402 $ 14.9429 $ 14.2064 $ 18.8392 $ 22.5700 $ 27.4057
Units outstanding end
of period............ 124,454 5,131,355 13,245,142 19,909,649 27,782,739 32,796,793 35,528,897
CAPITAL OPPORTUNITIES SERIES
Unit Value:
Beginning of
period............. -- -- -- -- -- $ 10.0000** $ 10.9234
End of period........ -- -- -- -- -- $ 10.9234 $ 13.7450
Units outstanding end
of period............ -- -- -- -- -- 1,520,787 6,175,224
EMERGING GROWTH SERIES
Unit Value:
Beginning of period -- -- -- -- $ 10.0000** $ 12.5675 $ 14.5136
End of period........ -- -- -- -- $ 12.5675 $ 14.5136 $ 17.4544
Units outstanding end
of period............ -- -- -- -- 5,346,104 16,998,044 25,039,986
EQUITY INCOME SERIES
Unit Value:
Beginning of
Period............. -- -- -- -- -- -- --
End of Period........ -- -- -- -- -- -- --
Units outstanding end
of period............ -- -- -- -- -- -- --
GLOBAL ASSET ALLOCATION SERIES
Unit Value:
Beginning of
period............. -- -- -- $ 10.0000** $ 10.0367 $ 12.0393 $ 13.7702
End of period........ -- -- -- $ 10.0367 $ 12.0393 $ 13.7702 $ 15.0565
Units outstanding end
of period............ -- -- -- 299,210 2,141,041 5,539,010 7,928,833
GLOBAL GOVERNMENTS SERIES
Unit Value:
Beginning of
period............. $10.0000 $ 10.6125 $ 10.5161 $ 12.3309 $ 11.6151 $ 13.2523 $ 13.6780
End of period........ $10.6125 $ 10.5161 $ 12.3309 $ 11.6151 $ 13.2523 $ 13.6780 $ 13.3854
Units outstanding end
of period............ 44,190 3,405,280 7,008,613 8,334,019 8,272,858 7,510,766 6,127,641
GLOBAL GROWTH SERIES
Unit Value:
Beginning of
period............. -- -- $ 10.0000** $ 10.6200 $ 10.7803 $ 12.3321 $ 13.7523
End of period........ -- -- $ 10.6200 $ 10.7803 $ 12.3321 $ 13.7523 $ 15.6398
Units outstanding end
of period............ -- -- 1,778,644 9,182,555 11,421,691 13,989,946 15,058,757
GLOBAL TOTAL RETURN SERIES
Unit Value:
Beginning of
period............. -- -- -- $ 10.0000** $ 10.0195 $ 11.6516 $ 13.1290
End of period........ -- -- -- $ 10.0195 $ 11.6516 $ 13.1290 $ 14.7153
Units outstanding end
of period............ -- -- -- 138,126 1,170,586 2,836,079 4,676,853
GOVERNMENT SECURITIES SERIES
Unit Value:
Beginning of
period............. $10.0000 $ 10.3731 $ 10.9166 $ 11.6996 $ 11.2891 $ 13.0981 $ 13.1252
End of period........ $10.3731 $ 10.9166 $ 11.6996 $ 11.2891 $ 13.0981 $ 13.1252 $ 14.0763
Units outstanding end
of period............ 256,848 5,447,047 13,661,303 18,784,262 18,082,586 19,714,114 20,508,844
HIGH YIELD SERIES
Unit Value:
Beginning of
period............. $10.0000 $ 10.0378 $ 11.3864 $ 13.2209 $ 12.7475 $ 14.7137 $ 16.2674
End of period........ $10.0378 $ 11.3864 $ 13.2209 $ 12.7475 $ 14.7137 $ 16.2674 $ 18.1622
Units outstanding end
of period............ 6,734 1,380,530 3,599,473 4,605,818 6,880,080 8,424,289 11,699,195
INTERNATIONAL GROWTH SERIES
Unit Value:
Beginning of
period............. -- -- -- -- -- $ 10.0000** $ 9.7480
End of period........ -- -- -- -- -- $ 9.7460 $ 9.4566
Units outstanding end
of period............ -- -- -- -- -- 564,742 2,390,056
INTERNATIONAL GROWTH AND INCOME SERIES
Unit Value:
Beginning of
period............. -- -- -- -- $ 10.0000** $ 10.0942 $ 10.4404
End of period........ -- -- -- -- $ 10.0942 $ 10.4404 $ 10.9674
Units outstanding end
of period............ -- -- -- -- 711,179 3,360,596 4,441,911
MANAGED SECTORS SERIES
Unit Value:
Beginning of
period............. $10.0000 $ 11.7627 $ 12.3521 $ 12.6760 $ 12.2606 $ 15.9925 $ 18.5452
End of period........ $11.7627 $ 12.3521 $ 12.6760 $ 12.2606 $ 15.9925 $ 18,5452 $ 22.9770
Units outstanding end
of period............ 51,219 2,614,510 4,525,423 6,351,641 8,542,869 10,541,726 11,326,719
MASSACHUSETTS INVESTORS GROWTH STOCK SERIES
Unit Value:
Beginning of
Period............. -- -- -- -- -- -- --
End of Period........ -- -- -- -- -- -- --
Units outstanding end
of period............ -- -- -- -- -- -- --
MASSACHUSETTS INVESTORS SERIES
Unit Value:
Beginning of
period............. $10.0000 $ 10.9605 $ 11.4156 $ 12.2052 $ 11.9036 $ 16.1344 $ 19.9527
End of period........ $10.9605 $ 11.4156 $ 12.2052 $ 11.9036 $ 16.1344 $ 19.9527 $ 25.9656
Units outstanding end
of period............ 85,141 2,557,065 6,412,270 10,979,711 16,712,586 26,199,975 40,709,531
<CAPTION>
1998
-----------
BOND SERIES
<S> <C>
Unit Value:
Beginning of
Period............. $ 10.0000**
End of Period........ $ 10.5921
Units outstanding end
of period............ 1,182,239
CAPITAL APPRECIATION SERI
Unit Value:
Beginning of
period............. $ 27,4057
End of period........ $ 34.7871
Units outstanding end
of period............ 37,500,481
CAPITAL OPPORTUNITIES SER
Unit Value:
Beginning of
period............. $ 13.7450
End of period........ $ 17.2085
Units outstanding end
of period............ 10,262,282
EMERGING GROWTH SERIES
Unit Value:
Beginning of period $ 17.4544
End of period........ $ 23.0408
Units outstanding end
of period............ 28,900,957
EQUITY INCOME SERIES
Unit Value:
Beginning of
Period............. $ 10.0000**
End of Period........ $ 10.4065
Units outstanding end
of period............ 528,238
GLOBAL ASSET ALLOCATION S
Unit Value:
Beginning of
period............. $ 15.0565
End of period........ $ 15.8203
Units outstanding end
of period............ 7,576,691
GLOBAL GOVERNMENTS SERIES
Unit Value:
Beginning of
period............. $ 13.3854
End of period........ $ 15.2422
Units outstanding end
of period............ 5,048,219
GLOBAL GROWTH SERIES
Unit Value:
Beginning of
period............. $ 15.6398
End of period........ $ 17.6676
Units outstanding end
of period............ 14,522,129
GLOBAL TOTAL RETURN SERIE
Unit Value:
Beginning of
period............. $ 14.7153
End of period........ $ 17.1741
Units outstanding end
of period............ 5,354,633
GOVERNMENT SECURITIES SER
Unit Value:
Beginning of
period............. $ 14.0763
End of period........ $ 15.0941
Units outstanding end
of period............ 23,218,234
HIGH YIELD SERIES
Unit Value:
Beginning of
period............. $ 18.1622
End of period........ $ 18.0207
Units outstanding end
of period............ 14,190,817
INTERNATIONAL GROWTH SERI
Unit Value:
Beginning of
period............. $ 9.4566
End of period........ $ 9.5047
Units outstanding end
of period............ 3,290,043
INTERNATIONAL GROWTH AND
Unit Value:
Beginning of
period............. $ 10.9674
End of period........ $ 13.1538
Units outstanding end
of period............ 5,214,558
MANAGED SECTORS SERIES
Unit Value:
Beginning of
period............. $ 22.9770
End of period........ $ 25.4406
Units outstanding end
of period............ 11,245,144
MASSACHUSETTS INVESTORS G
Unit Value:
Beginning of
Period............. $ 10.0000**
End of Period........ $ 11.9635
Units outstanding end
of period............ 4,121,518
MASSACHUSETTS INVESTORS S
Unit Value:
Beginning of
period............. $ 25.9656
End of period........ $ 31.7109
Units outstanding end
of period............ 51,880,765
</TABLE>
82
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED
PERIOD ENDED DECEMBER 31,
DECEMBER 31, ------------------------------------------------------------------------------------
1991* 1992 1993 1994 1995 1996 1997
------------ ---------- ------------- ----------- ------------- ------------- -----------
MFS/FOREIGN & COLONIAL EMERGING
MARKETS EQUITY SERIES
<S> <C> <C> <C> <C> <C> <C> <C>
Unit Value:
Beginning of
period............. -- -- -- -- -- $ 10.0000** $ 9.9199
End of period........ -- -- -- -- -- $ 9.9199 $ 10.8010
Units outstanding end
of period............ -- -- -- -- -- 329,630 2,159,228
MONEY MARKET SERIES
Unit Value:
Beginning of
period............. $10.0000 $ 10.0370 $ 10.2288 $ 10.3527 $ 10.5878 $ 11.0111 $ 11.3932
End of period........ $10.0370 $ 10.2288 $ 10.3527 $ 10.5878 $ 11.0111 $ 11.3932 $ 11.8058
Units outstanding end
of period............ 417,559 4,101,024 6,055,673 14,774,386 17,186,041 27,275,583 21,463,139
NEW DISCOVERY SERIES
Unit Value:
Beginning of
Period............. -- -- -- -- -- -- --
End of Period........ -- -- -- -- -- -- --
Units outstanding end
of period............ -- -- -- -- -- -- --
RESEARCH SERIES
Unit Value:
Beginning of
period............. -- -- -- $ 10.0000** $ 9.8615 $ 13.3663 $ 16.3209
End of period........ -- -- -- $ 9.8615 $ 13.3663 $ 16.3209 $ 19.4490
Units outstanding end
of period............ -- -- -- 392,528 5,341,160 19,577,745 35,654,917
RESEARCH GROWTH AND INCOME
Unit Value:
Beginning of
period............. -- -- -- -- -- -- $ 10.0000**
End of period........ -- -- -- -- -- -- $ 10.9235
Units outstanding end
of period............ -- -- -- -- -- -- 535,928
RESEARCH INTERNATIONAL SERIES
Unit Value:
Beginning of
Period............. -- -- -- -- -- -- --
End of Period........ -- -- -- -- -- -- --
Units outstanding end
of period............ -- -- -- -- -- -- --
STRATEGIC INCOME SERIES
Unit Value:
Beginning of
Period............. -- -- -- -- -- -- --
End of Period........ -- -- -- -- -- -- --
Units outstanding end
of period............ -- -- -- -- -- -- --
TOTAL RETURN SERIES
Unit Value:
Beginning of
period............. $10.0000 $ 10.3042 $ 11.0125 $ 12.3142 $ 11.8694 $ 14.8406 $ 16.6932
End of period........ $10.3042 $ 11.0125 $ 12.3142 $ 11.8694 $ 14.8406 $ 16.6932 $ 20.0793
Units outstanding end
of period............ 280,202 12,952,314 32,979,812 48,270,556 53,091,748 59,508,016 66,303,467
UTILITIES SERIES
Unit Value:
Beginning of
period............. -- -- $ 10.0000** $ 10.0000 $ 9.3739 $ 12.2403 $ 14.5260
End of period........ -- -- $ 10.0000 $ 9.3739 $ 12.2403 $ 14.5260 $ 19.0140
Units outstanding end
of period............ -- -- 279,796 2,273,439 3,410,047 4,671,192 6,101.638
<CAPTION>
1998
-----------
MFS/FOREIGN & COLONIAL EM
MARKETS EQUITY SERIES
<S> <C>
Unit Value:
Beginning of
period............. $ 10.8010
End of period........ $ 7.4615
Units outstanding end
of period............ 2,147,348
MONEY MARKET SERIES
Unit Value:
Beginning of
period............. $ 11.8058
End of period........ $ 12.2282
Units outstanding end
of period............ 29,387,086
NEW DISCOVERY SERIES
Unit Value:
Beginning of
Period............. $ 10.0000**
End of Period........ $ 10.5258
Units outstanding end
of period............ 794,859
RESEARCH SERIES
Unit Value:
Beginning of
period............. $ 19.4490
End of period........ $ 23.7119
Units outstanding end
of period............ 38,553,986
RESEARCH GROWTH AND INCOM
Unit Value:
Beginning of
period............. $ 10.9235
End of period........ $ 13.1605
Units outstanding end
of period............ 2,408,676
RESEARCH INTERNATIONAL SE
Unit Value:
Beginning of
Period............. $ 10.0000**
End of Period........ $ 9.3330
Units outstanding end
of period............ 190,267
STRATEGIC INCOME SERIES
Unit Value:
Beginning of
Period............. $ 10.0000**
End of Period........ $ 9.9530
Units outstanding end
of period............ 622,914
TOTAL RETURN SERIES
Unit Value:
Beginning of
period............. $ 20.0793
End of period........ $ 22.1273
Units outstanding end
of period............ 71,102,020
UTILITIES SERIES
Unit Value:
Beginning of
period............. $ 19.0140
End of period........ $ 22.0489
Units outstanding end
of period............ 9,023,102
</TABLE>
- ----------------------------------
* From November 18, 1991 (date of commencement of issuance of the Contracts) to
December 31, 1991.
** Unit value on date of commencement of operations of the respective
Sub-Account.
83
<PAGE>
APPENDIX C
WITHDRAWALS, WITHDRAWAL CHARGES AND THE MARKET VALUE ADJUSTMENT
PART 1: VARIABLE ACCOUNT (THE MARKET VALUE ADJUSTMENT DOES NOT APPLY TO THE
VARIABLE ACCOUNT)
WITHDRAWAL CHARGE CALCULATION FOR CERTIFICATES WITH DATE OF COVERAGE ON OR AFTER
NOVEMBER 1, 1994 WHICH CONTAIN THE CUMULATIVE WITHDRAWAL PROVISION:
FULL SURRENDER:
Assume a Purchase Payment of $40,000 is made on the Date of Coverage, no
additional Purchase Payments are made and there are no partial withdrawals. The
table below presents four examples of the withdrawal charge resulting from a
full surrender of the Participant's Account, based on hypothetical Account
Values.
<TABLE>
<CAPTION>
HYPOTHETICAL FREE PURCHASE WITHDRAWAL WITHDRAWAL
ACCOUNT ACCOUNT WITHDRAWAL PAYMENTS CHARGE CHARGE
YEAR VALUE AMOUNT LIQUIDATED PERCENTAGE AMOUNT
------- ------------ ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
1 $41,000 $ 4,000(a) $37,000 6.00% $2,220
3 $52,000 $12,000(b) $40,000 5.00% $2,000
7 $80,000 $28,000(c) $40,000 3.00% $1,200
9 $98,000 $36,000(d) $40,000 0.00% $ 0
</TABLE>
- ------------------------
(a) The free withdrawal amount during an account year is equal to 10% of new
payments (those payments made in current account year or in the six
immediately preceding account years) less any prior partial withdrawals in
that account year. Any portion of the free withdrawal amount that is not
used in the current Account Year is carried forward into future years. In
the first account year 10% of new payments is $4,000. Therefore, on full
surrender $4,000 is withdrawn free of the withdrawal charge and the purchase
payment liquidated is $37,000 (account value less free withdrawal amount).
The withdrawal charge amount is determined by applying the withdrawal charge
percentage to the purchase payment liquidated.
(b) In the third account year, the free withdrawal amount is equal to $12,000
($4,000 for the current account year, plus an additional $8,000 for account
years 1 & 2 because no partial withdrawals were taken and the unused free
withdrawal amount is carried forward into future account years). The
withdrawal charge percentage is applied to the liquidated purchase payment
(account value less free withdrawal amount).
(c) In the seventh account year, the free withdrawal amount is equal to $28,000
($4,000 for the current account year, plus an additional $24,000 for account
years 1-6, $4,000 for each account year because no partial withdrawals were
taken and the unused free withdrawal amount is carried forward into future
account years). The withdrawal charge percentage is applied to the
liquidated purchase payment (account value less free withdrawal amount, but
not greater than actual purchase payments).
(d) There is no withdrawal charge on any purchase payment liquidated that has
been in the participant's account for at least seven years.
PARTIAL WITHDRAWAL:
Assume a single purchase payment of $40,000 is deposited at issue, no
additional purchase payments are made, no partial withdrawals have been taken
prior to the fifth account year, and there
84
<PAGE>
are a series of three partial withdrawals made during the fifth account year of
$9,000, $12,000, and $15,000.
<TABLE>
<CAPTION>
HYPOTHETICAL PARTIAL FREE PURCHASE WITHDRAWAL WITHDRAWAL
ACCOUNT WITHDRAWAL WITHDRAWAL PAYMENTS CHARGE CHARGE
VALUE AMOUNT AMOUNT LIQUIDATED PERCENTAGE AMOUNT
------------ ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
(a) $64,000 $ 9,000 $20,000 $ 0 4.00% $ 0
(b) $56,000 $12,000 $11,000 $ 1,000 4.00% $ 40
(c) $40,000 $15,000 $ 0 $15,000 4.00% $600
</TABLE>
- ------------------------
(a) The free withdrawal amount during an account year is equal to 10% of new
payments (those payments made in current account year or in the six
immediately preceding account years) less any prior partial withdrawals in
that account year. Any portion of the free withdrawal amount that is not
used in the current account year is carried forward into future years. In
the fifth account year, the free withdrawal amount is equal to $20,000
($4,000 for the current account year, plus an additional $16,000 for account
years 1-4, $4,000 for each account year because no partial withdrawals were
taken). The partial withdrawal amount ($9,000) is less than the free
withdrawal amount so no purchase payments are liquidated and no withdrawal
charge applies.
(b) Since a partial withdrawal of $9,000 was taken, the remaining free
withdrawal amount is equal to $11,000. The $12,000 partial withdrawal will
first be applied against the $11,000 free withdrawal amount, and then will
liquidate purchase payments of $1,000, incurring a withdrawal charge of $40.
(c) The free withdrawal amount is zero since the previous partial withdrawals
have already used the free withdrawal amount. The entire partial withdrawal
amount will result in purchase payments being liquidated and will incur a
withdrawal charge. At the beginning of the next account year, 10% of
purchase payments would be available for withdrawal requests during that
account year.
WITHDRAWAL CHARGE CALCULATION FOR CERTIFICATES WITH DATE OF COVERAGE BEFORE
NOVEMBER 1, 1994 AND CERTIFICATES ISSUED AFTER THAT DATE WHICH DO NOT CONTAIN
THE CUMULATIVE WITHDRAWAL PROVISION.
This example assumes that the date of the full surrender or partial
withdrawal is during the 9th Account Year.
<TABLE>
<CAPTION>
1 2 3 4 5 6
--- ------------ ---------- ---------- --- ----------
<S> <C> <C> <C> <C> <C>
1 $ 1,000 $ 1,000 $ 0 0% $ 0
2 1,200 1,200 0 0 0
3 1,400 1,280 120 3 3.60
4 1,600 0 1,600 4 64.00
5 1,800 0 1,800 4 72.00
6 2,000 0 2,000 5 100.00
7 2,000 0 2,000 5 100.00
8 2,000 0 2,000 6 120.00
9 2,000 0 2,000 6 120.00
--
------------ ---------- ---------- ----------
$ 15,000 $ 3,480 $ 11,520 $ 579.60
------------ ---------- ---------- ----------
------------ ---------- ---------- ----------
</TABLE>
EXPLANATION OF COLUMNS IN TABLE
COLUMNS 1 AND 2:
Represent Purchase Payments ("Payments") and amounts of Payments. Each
Payment was made on the first day of each Account Year.
85
<PAGE>
COLUMN 3:
Represents the amounts that may be withdrawn without the imposition of
withdrawal charges, as follows:
a) Payments 1 and 2, $1,000 and $1,200, respectively, have been credited
to the Certificate for more than seven years.
b) $1,280 of Payment 3 represents 10% of Payments that have been credited
to the Certificate for less than seven years. The 10% amount is applied to the
oldest unliquidated Payment, then the next oldest and so forth.
COLUMN 4:
Represents the amount of each Payment that is subject to a withdrawal
charge. It is determined by subtracting the amount in Column 3 from the Payment
in Column 2.
COLUMN 5:
Represents the withdrawal charge percentages imposed on the amounts in
Column 4.
COLUMN 6:
Represents the withdrawal charge imposed on each Payment. It is determined
by multiplying the amount in Column 4 by the percentage in Column 5.
For example, the withdrawal charge imposed on Payment 8
= Payment 8 Column 4 X Payment 8 Column 5
= $2,000 X 6%
= $120
FULL SURRENDER:
The total of Column 6, $579.60, represents the total amount of withdrawal
charges imposed on Payments in this example.
PARTIAL WITHDRAWAL:
The sum of amounts in Column 6 for as many Payments as are liquidated
reflects the withdrawal charges imposed in the case of a partial withdrawal.
For example, if $7,000 of Payments (Payments 1, 2, 3, 4, and 5) were
withdrawn, the amount of the withdrawal charges imposed would be the sum of
amounts in Column 6 for Payments 1, 2, 3, 4 and 5 which is $139.60.
PART 2--FIXED ACCOUNT--EXAMPLES OF THE MARKET VALUE ADJUSTMENT (MVA)
The MVA factor is:
<TABLE>
<S> <C>
N/12
1 + I
( ----- ) -1
1 + J
</TABLE>
These examples assume the following:
1) the Guarantee Amount was allocated to a five year Guarantee Period
with a Guaranteed Interest Rate of 6% or .06 (l).
2) the date of surrender is two years from the Expiration Date (N =
24).
3) the value of the Guarantee Amount on the date of surrender is
$11,910.16.
4) the interest earned in the current Account Year is $674.16.
5) no transfers or partial withdrawals affecting this Guarantee Amount
have been made
86
<PAGE>
6) withdrawal charges, if any, are calculated in the same manner as
shown in the examples in Part 1.
EXAMPLE OF A NEGATIVE MVA:
Assume that on the date of surrender, the current rate (J) is 8% or .08.
<TABLE>
<C> <S> <C> <C>
N/12
1 + l
The MVA factor = ( ------ ) -1
1 + J
24/12
1 + .06
= ( ------ ) -1
1 + .08
= (.981)2 -1
= .963 -1
= - .037
</TABLE>
The value of the Guarantee Amount less interest credited to the Guarantee
Amount in the current Account Year is multiplied by the MVA factor to determine
the MVA
($11,910.16 - $674.16) X (-.037) = -$415.73
-$415.73 represents the MVA that will be deducted from the value of the
Guarantee Amount before the deduction of any withdrawal charge.
For a partial withdrawal of $2,000 from this Guarantee Amount, the MVA
would be ($2,000.00 - $674.16) X (-.037) = -$49.06. -$49.06 represents the MVA
that will be deducted from the partial withdrawal amount before the deduction of
any withdrawal charge.
EXAMPLE OF A POSITIVE MVA:
Assume that on the date of surrender, the current rate (J) is 5% or .05.
N/12
1 + l
The MVA factor = ( ------ ) -1
1 + J
24/12
1 + .06
= ( ------ ) -1
1 + .05
= (1.010)2 -1
= 1.019 -1
= .019
The value of the Guarantee Amount less interested credited to the
Guarantee Amount in the current Account Year is multiplied by the MVA factor to
determine the MVA
($11,910.16 - $674.16) X .019 = $213.48
$213.48 represents the MVA that would be added to the value of the
Guarantee Amount before the deduction of any withdrawal charge.
For a partial withdrawal of $2,000 from this Guarantee Amount, the MVA
would be ($2,000.00 - $674.16) X .019 = $25.19.
$25.19 represents the MVA that would be added to the value of the partial
withdrawal amount before the deduction of any withdrawal charge.
87
<PAGE>
<TABLE>
<S> <C>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
ANNUITY SERVICE MAILING ADDRESS:
C/O RETIREMENT PRODUCTS AND SERVICES
P.O. BOX 1024
BOSTON, MASSACHUSETTS 02103
TELEPHONE:
Toll Free (800) 752-7215
In Massachusetts (617) 348-9600
GENERAL DISTRIBUTOR
Clarendon Insurance Agency, Inc.
One Sun Life Executive Park
Wellesley Hills, Massachusetts 02481
AUDITORS
Deloitte Touche LLP
125 Summer Street
Boston, Massachusetts 02110
GOLD-1 5/99
</TABLE>
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
MAY 1, 1999
PROFILE
FUTURITY II
VARIABLE AND FIXED
ANNUITY
THIS PROFILE IS A SUMMARY OF SOME OF THE MORE IMPORTANT POINTS THAT YOU
SHOULD KNOW AND CONSIDER BEFORE PURCHASING THE CONTRACT. THE CONTRACT IS MORE
FULLY DESCRIBED IN THE FULL PROSPECTUS WHICH ACCOMPANIES THIS PROFILE. PLEASE
READ THE PROSPECTUS CAREFULLY.
1. THE FUTURITY II ANNUITY
The Futurity II Annuity is a flexible payment deferred annuity contract
("Contract") designed for use in connection with retirement and deferred
compensation plans, some of which may qualify for favorable federal income tax
treatment. The Contract is intended to help you achieve your retirement savings
or other long-term investment goals.
The Contract has two phases: an Accumulation Phase and an Income Phase.
During the Accumulation Phase you make payments into the Contract; any
investment earnings under your Contract accumulate on a tax-deferred basis and
are taxed as income only when withdrawn. During the Income Phase, we make
annuity payments in amounts determined in part by the amount of money you have
accumulated under your Contract during the Accumulation Phase. You choose when
the Income Phase begins.
You may choose among 36 variable investment options and a range of fixed
interest options. For a variable investment return you choose one or more
Sub-Accounts in our Variable Account, each of which invests in shares of a
corresponding mutual fund or series thereof (collectively, the "Funds") listed
in Section 4. The value of any portion of your Contract allocated to the
Sub-Accounts will fluctuate up or down depending on the performance of the Funds
you select, and you may experience losses. For a fixed interest rate, you may
choose one or more Guarantee Periods offered in our Fixed Account, each of which
earns its own Guaranteed Interest Rate if you keep your money in that Guarantee
Period for the specified length of time.
The Contract is designed to meet your need for investment flexibility. At
any time you may have amounts allocated among up to 18 of the available variable
and fixed options. Until we begin making annuity payments under your Contract,
you can, subject to certain limitations, transfer money between options up to 12
times each year without a transfer charge or adverse tax consequences.
2. ANNUITY PAYMENTS (THE INCOME PHASE)
Just as you can elect to have your Contract value accumulate on either a
variable or fixed basis, or a combination of both, you can elect to receive
annuity payments on either a variable or fixed basis or both. If you choose to
have any part of your annuity payments come from the Sub-Accounts, the dollar
amount of your annuity payments may fluctuate.
The Contract offers a variety of annuity options. You can select from
among the following methods of receiving either variable or fixed annuity
payments under your Contract: (1) monthly payments continuing for your lifetime
(assuming you are the annuitant); (2) monthly payments for your lifetime, but
with payments continuing to your chosen beneficiary for 5, 10, 15 or 20 years if
you die before the end of the period you have selected; (3) monthly payments for
your lifetime and the life of another person (usually your spouse) you have
chosen; and (4) monthly payments for a specified number of years (between 5 and
30), with a cash-out option for variable payments. We may also agree to other
annuity options in our discretion.
Once the Income Phase begins, you cannot change your choice of annuity
payment method.
3. PURCHASING A CONTRACT
You may purchase a Contract for $10,000 or more, under most circumstances.
You may increase the value of your investment by adding $1,000 or more at any
time during the Accumulation Phase. We
<PAGE>
will not accept a Purchase Payment if your Account Value is over $1 million, or
if the Purchase Payment would cause your Account Value to exceed $1 million,
unless we have approved the Payment in advance.
4. ALLOCATION OPTIONS
You can allocate your money among Sub-Accounts investing in the following
Funds:
<TABLE>
<S> <C>
AIM VARIABLE INSURANCE FUNDS, INC. MFS/SUN LIFE SERIES TRUST
V.I. Capital Appreciation Fund Capital Appreciation Series
V.I. Growth Fund Emerging Growth Series
V.I. Growth and Income Fund Government Securities Series
V.I. International Equity Fund High Yield Series
THE ALGER AMERICAN FUND Massachusetts Investors Growth Stock Series
Growth Portfolio Massachusetts Investors Trust Series
Income and Growth Portfolio New Discovery Series
Small Capitalization Portfolio Total Return Series
GOLDMAN SACHS VARIABLE INSURANCE TRUST Utilities Series
CORE Large Cap Growth Fund OCC ACCUMULATION TRUST
CORE Small Cap Equity Fund Equity Portfolio
CORE U.S. Equity Fund Managed Portfolio
Growth and Income Fund Mid Cap Portfolio
International Equity Fund Small Cap Portfolio
J.P. MORGAN SERIES TRUST II SUN CAPITAL ADVISERS TRUST
Equity Portfolio Sun Capital Investment Grade Bond Fund
International Opportunities Portfolio Sun Capital Money Market Fund
Small Company Portfolio Sun Capital Real Estate Fund
LORD ABBETT SERIES FUND, INC. WARBURG PINCUS TRUST
Growth and Income Portfolio Emerging Markets Portfolio
International Equity Portfolio
Post-Venture Capital Portfolio
Small Company Growth Portfolio
</TABLE>
Market conditions will determine the value of an investment in any Fund.
Each Fund is described in the relevant Fund Prospectus.
In addition to these variable options, you may also allocate your money to
one or more of the Guarantee Periods we make available. For each Guarantee
Period, we offer a Guaranteed Interest Rate for the specified length of time.
5. EXPENSES
The charges under the Contracts are as follows:
During the first 5 years of a Contract, we impose an annual Account Fee
equal to the lesser of $35 or 2% of the value of your Contract. After the fifth
year, we may change this fee annually, but it will never exceed the lesser of
$50 or 2% of the value of your Contract. During the Income Phase, the annual
Account Fee is $35. We also deduct insurance charges (which include an
administrative expense charge) equal to 1.40% per year of the average daily
value of the Contract allocated among the Sub-Accounts.
There are no sales charges when you purchase your Futurity II Annuity.
However, if you withdraw money from your Contract, we will, with certain
exceptions, impose a withdrawal charge. Your Contract allows a "free withdrawal
amount," which you may withdraw before you incur the withdrawal charge. The rest
of your withdrawal is subject to a withdrawal charge equal to a percentage of
each
2
<PAGE>
purchase payment you withdraw and is determined in accordance with the table
below. The percentage varies according to the number of Contract years the
purchase payment has been held in your account, including the year in which you
made the Payment, but not the year in which you withdrew it.
<TABLE>
<CAPTION>
NUMBER OF
YEARS IN ACCOUNT WITHDRAWAL CHARGE
- ----------------- -----------------------
<S> <C>
0-1 6%
2-3 5%
4-5 4%
6 3%
7 or more 0%
</TABLE>
If you withdraw, transfer, or annuitize money allocated to a Guarantee
Period more than 30 days before the expiration date of the Guarantee Period, the
amount will be subject to a Market Value Adjustment. This adjustment reflects
the relationship between our current Guaranteed Interest Rates and the
Guaranteed Interest Rate applicable to the amount being withdrawn. Generally, if
your Guaranteed Interest Rate is lower than the relevant current rate, then the
adjustment will decrease your Contract value. Conversely, if your Guaranteed
Interest Rate is higher than the relevant current rate, the adjustment will
increase your Contract value. The Market Value Adjustment will not apply to the
withdrawal of interest credited during the current year, or to transfers as part
of our dollar cost averaging program.
In addition to the charges we impose under the Contracts, there are
charges (which include management fees and operating expenses) imposed by each
Fund, which range from 0.59% to 1.40% of the average net assets of the Fund,
depending upon which Fund you have selected. The investment advisers to some of
the Funds have agreed to waive or reimburse a portion of Fund expenses; without
this agreement, Fund expenses could be higher. Some of these arrangements may be
terminated at any time.
The following chart is designed to help you understand the expenses you
will incur under your Contract, if you invest in one or more of the
Sub-Accounts. The column "Total Annual Expenses" shows the sum of the "Total
Annual Insurance Charges," as defined just above the chart, and the total
expenses (net of any applicable expense reimbursement or fee waiver) for each
Fund. The next two columns show two examples of the expenses, in dollars, you
would pay under a Contract. The examples assume that you invested $1,000 in a
Contract which earns 5% annually and that you withdraw your money (1) at the end
of one year or (2) at the end of 10 years. For the first year, the Total Annual
Expenses are deducted, as well as withdrawal charges. For year 10, the example
shows the aggregate of all of the annual expenses deducted for the 10 years, but
there is no withdrawal charge.
"Total Annual Insurance Charges" include the insurance charges of 1.40%,
plus an additional 0.10%, which is used to represent the $35 annual Account Fee
based on an assumed Contract value of $35,000. The actual impact of the Account
Fee may be greater or less than 0.10%, depending upon the value of your
Contract.
<TABLE>
<CAPTION>
EXAMPLES:
TOTAL
TOTAL ANNUAL TOTAL ANNUAL TOTAL EXPENSES
INSURANCE SERIES ANNUAL AT END
SUB-ACCOUNT CHARGES EXPENSES EXPENSES 1 YEAR
- ----------------------------------------------------------- ---------------- --------------- ----------- -----------
<S> <C> <C> <C> <C>
AIM V.I. Capital Appreciation Fund 1.50% 0.67% 2.17% $ 78
(1.40% + 0.10%)
AIM V.I. Growth Fund 1.50% 0.72% 2.22% $ 78
(1.40% + 0.10%)
AIM V.I. Growth and Income Fund 1.50% 0.65% 2.15% $ 78
(1.40% + 0.10%)
AIM V.I. International Equity Fund 1.50% 0.91% 2.41% $ 80
(1.40% + 0.10%)
Alger American Growth Portfolio 1.50% 0.79% 2.29% $ 79
(1.40% + 0.10%)
Alger American Income and Growth Portfolio 1.50% 0.70% 2.20% $ 78
(1.40% + 0.10%)
Alger American Small Capitalization Portfolio 1.50% 0.89% 2.39% $ 80
(1.40% + 0.10%)
<CAPTION>
SUB-ACCOUNT 10 YEARS
- ----------------------------------------------------------- -------------
<S> <C>
AIM V.I. Capital Appreciation Fund $ 250
AIM V.I. Growth Fund $ 255
AIM V.I. Growth and Income Fund $ 248
AIM V.I. International Equity Fund $ 275
Alger American Growth Portfolio $ 263
Alger American Income and Growth Portfolio $ 257
Alger American Small Capitalization Portfolio $ 273
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
EXAMPLES:
TOTAL
TOTAL ANNUAL TOTAL ANNUAL TOTAL EXPENSES
INSURANCE SERIES ANNUAL AT END
SUB-ACCOUNT CHARGES EXPENSES EXPENSES 1 YEAR
- ----------------------------------------------------------- ---------------- --------------- ----------- -----------
<S> <C> <C> <C> <C>
Goldman Sachs VIT CORE Large Cap Growth Fund 1.50% 0.80% 2.30% $ 79
(1.40% + 0.10%)
Goldman Sachs VIT CORE Small Cap Equity Fund 1.50% 0.90% 2.40% $ 80
(1.40% + 0.10%)
Goldman Sachs VIT CORE U.S. Equity Fund 1.50% 0.80% 2.30% $ 79
(1.40% + 0.10%)
Goldman Sachs VIT Growth and Income Fund 1.50% 0.90% 2.40% $ 80
(1.40% + 0.10%)
Goldman Sachs VIT International Equity Fund 1.50% 1.25% 2.75% $ 83
(1.40% + 0.10%)
J.P. Morgan Equity Portfolio 1.50% 0.90% 2.40% $ 80
(1.40% + 0.10%)
J.P. Morgan International Opportunities Portfolio 1.50% 1.20% 2.70% $ 83
(1.40% + 0.10%)
J.P. Morgan Small Company Portfolio 1.50% 1.15% 2.65% $ 82
(1.40% + 0.10%)
Lord Abbett Growth and Income Portfolio 1.50% 0.51% 2.01% $ 76
(1.40% + 0.10%)
MFS/Sun Life Capital Appreciation Series 1.50% 0.77% 2.27% $ 79
(1.40% + 0.10%)
MFS/Sun Life Emerging Growth Series 1.50% 0.78% 2.28% $ 79
(1.40% + 0.10%)
MFS/Sun Life Government Securities Series 1.50% 0.62% 2.12% $ 77
(1.40% + 0.10%)
MFS/Sun Life High Yield Series 1.50% 0.82% 2.32% $ 79
(1.40% + 0.10%)
MFS/Sun Life Massachusetts Investors Growth Stock Series 1.50% 0.97% 2.47% $ 81
(1.40% + 0.10%)
MFS/Sun Life Massachusetts Investors Trust Series 1.50% 0.59% 2.09% $ 77
(1.40% + 0.10%)
MFS/Sun Life New Discovery Series 1.50% 1.28% 2.78% $ 83
(1.40% + 0.10%)
MFS/Sun Life Total Return Series 1.50% 0.70% 2.20% $ 78
(1.40% + 0.10%)
MFS/Sun Life Utilities Series 1.50% 0.86% 2.36% $ 79
(1.40% + 0.10%)
OCC Equity Portfolio 1.50% 0.94% 2.44% $ 80
(1.40% + 0.10%)
OCC Managed Portfolio 1.50% 0.82% 2.32% $ 79
(1.40% + 0.10%)
OCC Mid Cap Portfolio 1.50% 1.05% 2.55% $ 81
(1.40% + 0.10%)
OCC Small Cap Portfolio 1.50% 0.88% 2.38% $ 80
(1.40% + 0.10%)
Sun Capital Investment Grade Bond Fund 1.50% 0.75% 2.25% $ 78
(1.40% + 0.10%)
Sun Capital Money Market Fund 1.50% 0.65% 2.15% $ 78
(1.40% + 0.10%)
Sun Capital Real Estate Fund 1.50% 1.25% 2.75% $ 83
(1.40% + 0.10%)
Warburg Pincus Emerging Markets Portfolio 1.50% 1.40% 2.90% $ 85
(1.40% + 0.10%)
Warburg Pincus International Equity Portfolio 1.50% 1.33% 2.83% $ 84
(1.40% + 0.10%)
Warburg Pincus Post-Venture Capital Portfolio 1.50% 1.40% 2.90% $ 85
(1.40% + 0.10%)
Warburg Pincus Small Company Growth Portfolio 1.50% 1.14% 2.64% $ 82
(1.40% + 0.10%)
<CAPTION>
SUB-ACCOUNT 10 YEARS
- ----------------------------------------------------------- -------------
<S> <C>
Goldman Sachs VIT CORE Large Cap Growth Fund $ 264
Goldman Sachs VIT CORE Small Cap Equity Fund $ 274
Goldman Sachs VIT CORE U.S. Equity Fund $ 264
Goldman Sachs VIT Growth and Income Fund $ 274
Goldman Sachs VIT International Equity Fund $ 308
J.P. Morgan Equity Portfolio $ 274
J.P. Morgan International Opportunities Portfolio $ 303
J.P. Morgan Small Company Portfolio $ 298
Lord Abbett Growth and Income Portfolio $ 234
MFS/Sun Life Capital Appreciation Series $ 262
MFS/Sun Life Emerging Growth Series $ 265
MFS/Sun Life Government Securities Series $ 246
MFS/Sun Life High Yield Series $ 268
MFS/Sun Life Massachusetts Investors Growth Stock Series $ 281
MFS/Sun Life Massachusetts Investors Trust Series $ 242
MFS/Sun Life New Discovery Series $ 311
MFS/Sun Life Total Return Series $ 253
MFS/Sun Life Utilities Series $ 270
OCC Equity Portfolio $ 278
OCC Managed Portfolio $ 266
OCC Mid Cap Portfolio $ 289
OCC Small Cap Portfolio $ 272
Sun Capital Investment Grade Bond Fund $ 258
Sun Capital Money Market Fund $ 248
Sun Capital Real Estate Fund $ 308
Warburg Pincus Emerging Markets Portfolio $ 322
Warburg Pincus International Equity Portfolio $ 319
Warburg Pincus Post-Venture Capital Portfolio $ 322
Warburg Pincus Small Company Growth Portfolio $ 298
</TABLE>
For more detailed information about Contract fees and expenses, please
refer to the fee table and discussion of Contract charges contained in the full
Prospectus which accompanies this Profile.
4
<PAGE>
6. TAXES
Your earnings are not taxed until you take them out of your Contract. If
you take money out, earnings come out first and are taxed as income. If your
Contract is funded with pre-tax or tax deductible dollars (such as with a
pension or IRA contribution) -- we call this a Qualified Contract -- your entire
withdrawal will be taxable. If you are younger than 59 1/2 when you take money
out, you may be charged a 10% federal penalty tax on the earnings. Annuity
payments during the Income Phase are considered in part a return of your
original investment. That portion of each payment is not taxable, except under a
Qualified Contract, in which case the entire payment will be taxable. In all
cases, you should consult with your tax adviser for specific tax information.
7. ACCESS TO YOUR MONEY
You can withdraw money from your Contract at any time during the
Accumulation Phase. You may withdraw a portion of the value of your Contract in
each year without the imposition of the withdrawal charge -- 10% of all payments
you have made in the last 7 years, plus any payment we have held for at least 7
years. All other purchase payments you withdraw will be subject to a withdrawal
charge ranging from 6% to 0%. You may also be required to pay income tax and
possible tax penalties on any money you withdraw.
We do not assess a withdrawal charge upon annuitization or transfers. In
certain circumstances, we will waive the withdrawal charges for a full
withdrawal when you are confined to an eligible nursing home. In addition, there
may be other circumstances under which we may waive the withdrawal charge.
In addition to the withdrawal charge, amounts you withdraw, transfer or
annuitize from the Fixed Account before your Guarantee Period has ended may be
subject to a Market Value Adjustment.
8. PERFORMANCE
If you invest in the Variable Account, the value of your Contract will
increase or decrease depending upon the investment performance of the Fund you
choose. The Sub-Accounts have not been in operation for a full calendar year;
therefore no performance information is provided in this Profile.
9. DEATH BENEFIT
If you die before the Contract reaches the Income Phase, the beneficiary
will receive a death benefit. To calculate the death benefit, we use a "Death
Benefit Date", which is the earliest date we have both due proof of death and a
written request specifying the manner of payment.
If you were 85 or younger when we issued your Contract, the death benefit
is the greatest of:
(1) the value of the Contract on the Death Benefit Date;
(2) the amount we would pay in the event of a full surrender of the
Contract on the Death Benefit Date;
(3) the value of the Contract on the most recent 7 year anniversary of the
Contract, plus any purchase payments made and adjusted for any partial
withdrawals and charges made after that anniversary;
(4) your highest Contract Value on any Account Anniversary before your
81st birthday, adjusted for subsequent purchase payments and partial
withdrawals and charges made between that Account Anniversary and the
Death Benefit Date; and
(5) your total Purchase Payments, plus interest on Purchase Payments
allocated to and transfers to the Variable Account -- while they
remain in the Variable Account -- at 5% per year until the first day
of the month following your 80th birthday, or until the Purchase
Payment or amount transferred has doubled in amount, whichever is
earlier; this amount is adjusted for partial withdrawals.
5
<PAGE>
If you were 86 or older when we issued your Contract, the death benefit is
equal to the amount set forth in (2) above, in this Section 9.
10. OTHER INFORMATION
FREE LOOK. Depending upon applicable state law, if you cancel your
Contract within 10 days after receiving it we will send you the value of your
Contract as of the day we received your cancellation request (this may be more
or less than the original purchase payment) and we will not deduct a withdrawal
charge. However, if applicable state or federal law requires, we will refund the
full amount of any purchase payment(s) we receive and the "free look" period may
be greater than 10 days.
NO PROBATE. In most cases, when you die, the beneficiary will receive the
death benefit without going through probate. However, avoiding probate does not
mean that the beneficiary will not have tax liability as a result of receiving
the death benefit.
WHO SHOULD PURCHASE A CONTRACT? The Contract is designed for those seeking
long-term tax deferred accumulation of assets and annuity features, generally
for retirement or other long-term purposes. The tax-deferred feature is most
attractive to purchasers in high federal and state income tax brackets. You
should note that qualified retirement investments automatically provide tax
deferral regardless of whether the underlying contract is an annuity. You should
not buy a Contract if you are looking for a short-term investment or if you
cannot risk a decrease in the value of your investment.
CONFIRMATIONS AND QUARTERLY STATEMENTS. You will receive a confirmation of
each transaction within your Contract. On a quarterly basis, you will receive a
complete statement of your transactions over the past quarter and a summary of
your account values during that period.
ADDITIONAL FEATURES. The Futurity II Annuity offers the following
additional convenient features, which you may choose at no extra charge.
Dollar Cost Averaging -- This program lets you invest gradually in up to
12 Sub-Accounts.
Asset Allocation -- One or more asset allocation programs may be available
in connection with the Contract.
Systematic Withdrawal Program -- This program allows you to receive
quarterly, semi-annual or annual payments during the Accumulation Phase.
Portfolio Rebalancing Programs -- Under this program, we automatically
reallocate your investments in the Sub-Accounts to maintain the proportions you
select. You can elect rebalancing on a quarterly, semi-annual or annual basis.
11. INQUIRIES
If you would like more information about buying a Contract, please contact
your broker or registered representative. If you have any other questions,
please contact us at:
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
ANNUITY SERVICE MAILING ADDRESS
C/O RETIREMENT PRODUCTS AND SERVICES
P.O. BOX 9133
BOSTON, MASSACHUSETTS 02117
TEL: TOLL FREE (888) 786-2435
IN MASSACHUSETTS (617) 348-9600
6
<PAGE>
PROSPECTUS
MAY 1, 1999
FUTURITY II
Sun Life Assurance Company of Canada (U.S.) and Sun Life of Canada (U.S.)
Variable Account F offer the flexible payment deferred annuity contracts and
certificates described in this Prospectus to groups and individuals.
You may choose among 36 variable investment options and a range of fixed
options. The variable options are Sub-Accounts in the Variable Account, each of
which invests in shares of one of the following mutual funds or a series thereof
(the "Funds").
<TABLE>
<S> <C>
AIM VARIABLE INSURANCE FUNDS, INC. MFS/SUN LIFE SERIES TRUST
V.I. Capital Appreciation Fund Capital Appreciation Series
V.I. Growth Fund Emerging Growth Series
V.I. Growth and Income Fund Government Securities Series
V.I. International Equity Fund High Yield Series
THE ALGER AMERICAN FUND Massachusetts Investors Growth Stock Series
Growth Portfolio Massachusetts Investors Trust Series
Income and Growth Portfolio New Discovery Series
Small Capitalization Portfolio Total Return Series
GOLDMAN SACHS VARIABLE INSURANCE TRUST Utilities Series
CORE Large Cap Growth Fund OCC ACCUMULATION TRUST
CORE Small Cap Equity Fund Equity Portfolio
CORE U.S. Equity Fund Managed Portfolio
Growth and Income Fund Mid Cap Portfolio
International Equity Fund Small Cap Portfolio
J.P. MORGAN SERIES TRUST II SUN CAPITAL ADVISERS TRUST
Equity Portfolio Sun Capital Investment Grade Bond Fund
International Opportunities Portfolio Sun Capital Money Market Fund
Small Company Portfolio Sun Capital Real Estate Fund
LORD ABBETT SERIES FUND, INC. WARBURG PINCUS TRUST
Growth and Income Portfolio Emerging Markets Portfolio
International Equity Portfolio
Post-Venture Capital Portfolio
Small Company Growth Portfolio
</TABLE>
The fixed account options are available for specified time periods, called
Guarantee Periods, and pay interest at a guaranteed rate for each period.
PLEASE READ THIS PROSPECTUS AND THE FUND PROSPECTUSES CAREFULLY BEFORE
INVESTING AND KEEP THEM FOR FUTURE REFERENCE. THEY CONTAIN IMPORTANT INFORMATION
ABOUT THE FUTURITY II ANNUITY AND THE FUNDS.
We have filed a Statement of Additional Information dated May 1, 1999 (the
"SAI") with the Securities and Exchange Commission (the "SEC"), which is
incorporated by reference in this Prospectus. The table of contents for the SAI
is on page 78 of this Prospectus. You may obtain a copy without charge by
writing to our Annuity Service Mailing Address or by telephoning (800) 752-7215
or (617) 348-9600. In addition, the SEC maintains a website (http://www.sec.gov)
that contains the SAI, material incorporated by reference, and other information
regarding companies that file with the SEC.
THE CONTRACTS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY,
ANY BANK, AND ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY.
THE SEC HAS NOT APPROVED OR DISAPPROVED THESE SECURITIES OR PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
ANY REFERENCE IN THIS PROSPECTUS TO RECEIPT BY US MEANS RECEIPT AT THE FOLLOWING
ADDRESS:
ANNUITY SERVICE MAILING ADDRESS, C/O SUN LIFE ASSURANCE COMPANY OF CANADA
(U.S.)
RETIREMENT PRODUCTS AND SERVICES, P.O. BOX 9133, BOSTON, MASSACHUSETTS
02117
1
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Special Terms
Expense Summary
Summary of Contract Expenses
Underlying Fund Annual Expenses
Examples
Condensed Financial Information
The Futurity II Annuity
Communicating To Us About Your Contract
Sun Life Assurance Company of Canada (U.S.)
The Variable Account
Variable Account Options: The Funds
The Fixed Account
The Fixed Account Options: The Guarantee Periods
The Accumulation Phase
Issuing Your Contract
Amount and Frequency of Purchase Payments
Allocation of Net Purchase Payments
Your Account
Your Account Value
Variable Account Value
Fixed Account Value
Transfer Privilege
Waivers; Reduced Charges; Credits; Bonus Guaranteed Interest Rates
Optional Programs
Withdrawals, Withdrawal Charge and Market Value Adjustment
Cash Withdrawals
Withdrawal Charge
Market Value Adjustment
Contract Charges
Account Fee
Administrative Expense Charge
Mortality and Expense Risk Charge
Premium Taxes
Fund Expenses
Modification in the Case of Group Contracts
Death Benefit
Amount of Death Benefit
Method of Paying Death Benefit
Non-Qualified Contracts
Selection and Change of Beneficiary
Payment of Death Benefit
Due Proof of Death
The Income Phase -- Annuity Provisions
Selection of the Annuitant or Co-Annuitant
Selection of the Annuity Commencement Date
Annuity Options
Selection of Annuity Option
Amount of Annuity Payments
Exchange of Variable Annuity Units
Account Fee
Annuity Payment Rates
Annuity Options as Method of Payment for Death Benefit
</TABLE>
2
<PAGE>
<TABLE>
<S> <C>
Other Contract Provisions
Exercise of Contract Rights
Change of Ownership
Voting of Fund Shares
Periodic Reports
Substitution of Securities
Change in Operation of Variable Account
Splitting Units
Modification
Discontinuance of New Participants
Reservation of Rights
Right to Return
Federal Tax Status
Introduction
Deductibility of Purchase Payments
Pre-Distribution Taxation of Contracts
Distributions and Withdrawals from Non-Qualified Contracts
Distribution and Withdrawals from Qualified Contracts
Withholding
Purchase of Immediate Annuity Contract and Deferred Annuity Contract
Investment Diversification and Control
Tax Treatment of the Company and the Variable Account
Qualified Retirement Plans
Pension and Profit-Sharing Plans
Tax-Sheltered Annuities
Individual Retirement Accounts
Roth IRAs
Administration of the Contracts
Distribution of the Contracts
Performance Information
Available Information
Incorporation of Certain Documents by Reference
Additional Information About the Company
Business of the Company
Selected Financial Data
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Demutualization
Year 2000 Compliance
Sale of Subsidiary
Quantitative and Qualitative Disclosures About Market Risk
Reinsurance
Reserves
Investments
Competition
Employees
Properties
State Regulation
Legal Proceedings
Accountants
Financial Statements
Table of Contents of Statement of Additional Information
Appendix A -- Glossary
Appendix B -- Condensed Financial Information-- Accumulation Unit Values
Appendix C -- Withdrawals, Withdrawal Charges and the Market Value Adjustment
</TABLE>
3
<PAGE>
SPECIAL TERMS
Your Contract is a legal document that uses a number of specially defined
terms. We explain most of the terms that we use in this Prospectus in the
context where they arise, and some are self-explanatory. In addition, for
convenient reference, we have compiled a list of these terms in the Glossary
included at the back of this Prospectus as Appendix A. If, while you are reading
this Prospectus, you come across a term that you do not understand, please refer
to the Glossary for an explanation.
EXPENSE SUMMARY
The purpose of the following table is to help you understand the costs and
expenses that you will bear directly and indirectly under a Contract WHEN YOU
ALLOCATE MONEY TO THE VARIABLE ACCOUNT. The table reflects expenses of the
Variable Account as well as of each Fund. The table should be considered
together with the narrative provided under the heading "Contract Fees" in this
Prospectus, and with the Funds' prospectuses. In addition to the expenses listed
below, we may deduct premium taxes.
SUMMARY OF CONTRACT EXPENSES
<TABLE>
<S> <C>
TRANSACTION EXPENSES
Sales Load Imposed on Purchase Payments............................................ $ 0
Deferred Sales Load (as a percentage of Purchase Payments withdrawn) (1)
Number of Account Years Purchase Payment in Account
0-1............................................................................ 6%
2-3............................................................................ 5%
4-5............................................................................ 4%
6.............................................................................. 3%
7 or more...................................................................... 0%
Transfer Fee (2)................................................................... $ 0
ANNUAL ACCOUNT FEE per Contract or Certificate (3) $ 35
VARIABLE ACCOUNT ANNUAL EXPENSES (as a percentage of average Variable Account
assets)
Mortality and Expense Risk Charge................................................ 1.25%
Administrative Expense Charge.................................................... 0.15%
Other Fees and Expenses of the Variable Account.................................. 0.00%
-----
Total Variable Account Annual Expenses............................................. 1.40%
</TABLE>
- ------------------------
(1) A portion of your Account may be withdrawn each year without imposition of
any withdrawal charge, and after a Purchase Payment has been in your Account
for 7 Account Years it may be withdrawn free of the withdrawal charge.
(2) A Market Value Adjustment may be imposed on amounts transferred from or
within the Fixed Account.
(3) The Annual Account Fee is the lesser of $35 and 2% of your Account Value in
Account Years 1 through 5; thereafter, the fee may be changed annually, but
it may not exceed the lesser of $50 and 2% of your Account Value.
4
<PAGE>
UNDERLYING FUND ANNUAL EXPENSES (1)
(AS A PERCENTAGE OF FUND NET ASSETS)
<TABLE>
<CAPTION>
TOTAL FUND
MANAGEMENT OTHER ANNUAL
FEES (AFTER EXPENSES (AFTER EXPENSES (AFTER
REIMBURSEMENT)(2) REIMBURSEMENT)(2) REIMBURSEMENT)(2)
------------------- ------------------- -------------------
<S> <C> <C> <C>
AIM V.I. Capital Appreciation Fund....................... 0.62% 0.05% 0.67%
AIM V.I. Growth Fund..................................... 0.64% 0.08% 0.72%
AIM V.I. Growth and Income Fund.......................... 0.61% 0.04% 0.65%
AIM V.I. International Equity Fund....................... 0.75% 0.16% 0.91%
Alger American Growth Portfolio.......................... 0.75% 0.04% 0.79%
Alger American Income and Growth Portfolio............... 0.62% 0.08% 0.70%
Alger American Small Capitalization Portfolio............ 0.85% 0.04% 0.89%
Goldman Sachs VIT CORE Large Cap Growth Fund(3).......... 0.70% 0.10% 0.80%
Goldman Sachs VIT CORE Small Cap Equity Fund(3).......... 0.75% 0.15% 0.90%
Goldman Sachs VIT CORE U.S. Equity Fund(3)............... 0.70% 0.10% 0.80%
Goldman Sachs VIT Growth and Income Fund(3).............. 0.75% 0.15% 0.90%
Goldman Sachs VIT International Equity Fund(3)........... 1.00% 0.25% 1.25%
J.P. Morgan Equity Portfolio(4).......................... 0.40% 0.50% 0.90%
J.P. Morgan International Opportunities Portfolio(4)..... 0.60% 0.60% 1.20%
J.P. Morgan Small Company Portfolio(4)................... 0.60% 0.55% 1.15%
Lord Abbett Growth and Income Portfolio.................. 0.50% 0.01% 0.51%
MFS/Sun Life Capital Appreciation Series................. 0.73% 0.04% 0.77%
MFS/Sun Life Emerging Growth Series...................... 0.72% 0.06% 0.78%
MFS/Sun Life Government Securities Series................ 0.55% 0.07% 0.62%
MFS/Sun Life High Yield Series........................... 0.75% 0.07% 0.82%
MFS/Sun Life Massachusetts Investors Growth Stock
Series.................................................. 0.75% 0.22% 0.97%
MFS/Sun Life Massachusetts Investors Trust Series........ 0.55% 0.04% 0.59%
MFS/Sun Life New Discovery Series(5)..................... 0.90% 0.38% 1.28%
MFS/Sun Life Total Return Series......................... 0.65% 0.05% 0.70%
MFS/Sun Life Utilities Series............................ 0.75% 0.11% 0.86%
OCC Equity Portfolio(6).................................. 0.80% 0.14% 0.94%
OCC Managed Portfolio(6)................................. 0.78% 0.04% 0.82%
OCC Mid Cap Portfolio(6)................................. 0.00% 1.05% 1.05%
OCC Small Cap Portfolio(6)............................... 0.80% 0.08% 0.88%
Sun Capital Investment Grade Bond Fund(3)(7)............. 0.60% 0.15% 0.75%
Sun Capital Money Market Fund(3)(7)...................... 0.50% 0.15% 0.65%
Sun Capital Real Estate Fund(3)(7)....................... 0.95% 0.30% 1.25%
Warburg Pincus Emerging Markets Portfolio(3)............. 0.20% 1.20% 1.40%
Warburg Pincus International Equity Portfolio............ 1.00% 0.33% 1.33%
Warburg Pincus Post-Venture Capital Portfolio(3)......... 1.08% 0.32% 1.40%
Warburg Pincus Small Company Growth Portfolio............ 0.90% 0.24% 1.14%
</TABLE>
5
<PAGE>
- ------------------------
(1) The information relating to Fund expenses was provided by the Funds and we
have not independently verified it. You should consult the Fund prospectuses
for more information about Fund expenses
(2) "Management Fees," "Other Expenses" and "Total Fund Annual Expenses" are
based on actual expenses for the fiscal year ended December 31, 1998, net of
any applicable expense reimbursement or waiver.
(3) The investment advisers for the indicated Funds have voluntarily agreed to
waive or reimburse a portion of the management fees and/or operating
expenses resulting in a reduction of the total expenses. Absent any such
waiver or reimbursement, "Management Fees," "Other Expenses" and "Total Fund
Annual Expenses" were: 0.70%, 2.17%, and 2.87% for the Goldman Sachs VIT
CORE Large Cap Growth Fund; 0.75%, 3.17%, and 3.92% for the Goldman Sachs
VIT CORE Small Cap Equity Fund; 0.70%, 2.13%, and 2.83% for the Goldman
Sachs VIT CORE U.S. Equity Fund; 0.75%, 1.94%, and 2.69% for the Goldman
Sachs VIT Growth and Income Fund; 1.00%, 1.97%, and 2.97% for the Goldman
Sachs VIT International Equity Fund; 0.60%, 3.50% and 4.10% for the Sun
Capital Investment Grade Bond Fund; 0.50%, 11.79% and 12.29% for the Sun
Capital Money Market Fund; 0.95%, 6.49% and 7.44% for the Sun Capital Real
Estate Fund; 1.25%, 6.96%, and 8.21% for the Warburg Pincus Emerging Markets
Portfolio; and 1.25%, 0.45%, and 1.70% for the Warburg Pincus Post-Venture
Capital Portfolio. Fee waivers and expense reimbursements for the Warburg
Pincus Emerging Markets Portfolio and the Warburg Pincus Post-Venture
Capital Portfolio, the Sun Capital Funds, and the Goldman Sachs Funds may be
discontinued at any time.
(4) An affiliate of the adviser has agreed to reimburse the Funds, to the extent
certain expenses exceed the following percentages of the Fund's daily net
assets during fiscal year 1999: 0.90% for the J.P. Morgan Equity Portfolio,
1.20% for the J.P. Morgan International Opportunities Portfolio, and 1.15%
for the J.P. Morgan Small Company Portfolio. Absent this reimbursement,
"Total Fund Annual Expenses" would have been 1.48% for the J.P. Morgan
Equity Portfolio, 3.26% for the J.P. Morgan International Opportunities
Portfolio, and 3.43% for the J.P. Morgan Small Company Portfolio.
(5) The Fund's adviser has agreed to bear the Fund's expenses, excluding
management fees, taxes, extraordinary expenses and brokerage and transaction
costs, in excess of 0.35% of the annual percentage of the Fund's average
daily net assets. Absent the fee waiver and/or expense reimbursement, Other
Expenses would have been 0.70% and Total Fund Annual Expenses would have
been 1.60%. These arrangements will remain in effect until at least May 1,
2000, absent an earlier modification by the Fund's Board of Trustees.
(6) Total Fund Annual Expenses for the OCC Equity Portfolio, the OCC Small Cap
Portfolio, the OCC Managed Portfolio and the OCC Mid Cap Portfolio are
limited contractually by OpCap Advisers so that the Funds' respective
annualized operating expenses (net of expense offsets) do not exceed 1% of
average daily net assets. Absent this limit, "Management Fees", "Other
Expenses" and "Total Expenses" were 0.80%, 3.48%, and 4.28% for the OCC Mid
Cap Portfolio. "Other Expenses" are shown gross of expense offsets afforded
the portfolio, which effectively lowered custody expenses.
(7) To the extent that the expense ratio of any Fund in the Sun Capital Advisers
Trust falls below the Fund's expense limit, the Fund's adviser reserves the
right to be reimbursed for management fees waived and Fund expenses paid by
it during the prior two years.
6
<PAGE>
EXAMPLES
If you surrender your Contract at the end of the applicable time period,
you would pay the following expenses on a $1,000 investment, assuming a 5%
annual return:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
AIM V.I. Capital Appreciation Fund........................................ $ 78 $ 107 $ 142 $ 250
AIM V.I. Growth Fund...................................................... $ 78 $ 109 $ 145 $ 255
AIM V.I. Growth and Income Fund........................................... $ 78 $ 107 $ 141 $ 248
AIM V.I. International Equity Fund........................................ $ 80 $ 114 $ 154 $ 275
Alger American Growth Portfolio........................................... $ 79 $ 111 $ 148 $ 263
Alger American Income and Growth Portfolio................................ $ 78 $ 109 $ 146 $ 257
Alger American Small Capitalization Portfolio............................. $ 80 $ 114 $ 153 $ 273
Goldman Sachs VIT CORE Large Cap Growth Fund.............................. $ 79 $ 111 $ 149 $ 264
Goldman Sachs VIT CORE Small Cap Equity Fund.............................. $ 80 $ 114 $ 154 $ 274
Goldman Sachs VIT CORE U.S. Equity Fund................................... $ 79 $ 111 $ 149 $ 264
Goldman Sachs VIT Growth and Income Fund.................................. $ 80 $ 114 $ 154 $ 274
Goldman Sachs VIT International Equity Fund............................... $ 83 $ 124 $ 170 $ 308
J.P. Morgan Equity Portfolio.............................................. $ 80 $ 114 $ 154 $ 274
J.P. Morgan International Opportunities Portfolio......................... $ 83 $ 122 $ 168 $ 303
J.P. Morgan Small Company Portfolio....................................... $ 82 $ 121 $ 165 $ 298
Lord Abbett Growth and Income Portfolio................................... $ 78 $ 107 $ 142 $ 250
MFS/Sun Life Capital Appreciation Series.................................. $ 79 $ 110 $ 148 $ 262
MFS/Sun Life Emerging Growth Series....................................... $ 79 $ 111 $ 149 $ 265
MFS/Sun Life Government Securities Series................................. $ 77 $ 106 $ 140 $ 246
MFS/Sun Life High Yield Series............................................ $ 79 $ 112 $ 151 $ 268
MFS/Sun Life Massachusetts Investors Growth Stock Series.................. $ 81 $ 116 $ 157 $ 281
MFS/Sun Life Massachusetts Investors Trust Series......................... $ 77 $ 105 $ 139 $ 242
MFS/Sun Life New Discovery Series......................................... $ 83 $ 125 $ 172 $ 311
MFS/Sun Life Total Return Series.......................................... $ 78 $ 108 $ 144 $ 253
MFS/Sun Life Utilities Series............................................. $ 79 $ 113 $ 152 $ 270
OCC Equity Portfolio...................................................... $ 80 $ 115 $ 155 $ 278
OCC Managed Portfolio..................................................... $ 76 $ 99 $ 125 $ 207
OCC Mid Cap Portfolio..................................................... $ 81 $ 118 $ 161 $ 289
OCC Small Cap Portfolio................................................... $ 80 $ 113 $ 153 $ 272
Sun Capital Investment Grade Bond Fund.................................... $ 78 $ 110 $ 146 $ 258
Sun Capital Money Market Fund............................................. $ 78 $ 107 $ 141 $ 248
Sun Capital Real Estate Fund.............................................. $ 83 $ 124 $ 170 $ 308
Warburg Pincus Emerging Markets Portfolio................................. $ 85 $ 128 $ 177 $ 322
Warburg Pincus International Equity Portfolio............................. $ 84 $ 127 $ 175 $ 319
Warburg Pincus Post-Venture Capital Portfolio............................. $ 85 $ 128 $ 177 $ 322
Warburg Pincus Small Company Growth Portfolio............................. $ 82 $ 121 $ 165 $ 298
</TABLE>
7
<PAGE>
If you do NOT surrender your Contract, or if you annuitize at the end of
the applicable time period, you would pay the following expenses on a $1,000
investment, assuming a 5% annual return:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
AIM V.I. Capital Appreciation Fund........................................ $ 22 $ 68 $ 116 $ 250
AIM V.I. Growth Fund...................................................... $ 23 $ 69 $ 119 $ 255
AIM V.I. Growth and Income Fund........................................... $ 22 $ 67 $ 115 $ 248
AIM V.I. International Equity Fund........................................ $ 24 $ 75 $ 129 $ 275
Alger American Growth Portfolio........................................... $ 23 $ 72 $ 123 $ 263
Alger American Income and Growth Portfolio................................ $ 23 $ 70 $ 120 $ 257
Alger American Small Capitalization Portfolio............................. $ 24 $ 75 $ 128 $ 273
Goldman Sachs VIT CORE Large Cap Growth Fund.............................. $ 23 $ 72 $ 123 $ 264
Goldman Sachs VIT CORE Small Cap Equity Fund.............................. $ 24 $ 75 $ 128 $ 274
Goldman Sachs VIT CORE U.S. Equity Fund................................... $ 23 $ 72 $ 123 $ 264
Goldman Sachs VIT Growth and Income Fund.................................. $ 24 $ 75 $ 128 $ 274
Goldman Sachs VIT International Equity Fund............................... $ 28 $ 85 $ 145 $ 308
J.P. Morgan Equity Portfolio.............................................. $ 24 $ 75 $ 128 $ 274
J.P. Morgan International Opportunities Portfolio......................... $ 27 $ 84 $ 143 $ 303
J.P. Morgan Small Company Portfolio....................................... $ 27 $ 82 $ 141 $ 298
Lord Abbett Growth and Income Portfolio................................... $ 22 $ 68 $ 116 $ 250
MFS/Sun Life Capital Appreciation Series.................................. $ 23 $ 71 $ 122 $ 262
MFS/Sun Life Emerging Growth Series....................................... $ 23 $ 72 $ 124 $ 265
MFS/Sun Life Government Securities Series................................. $ 22 $ 67 $ 114 $ 246
MFS/Sun Life High Yield Series............................................ $ 24 $ 73 $ 125 $ 268
MFS/Sun Life Massachusetts Investors Growth Stock Series.................. $ 25 $ 77 $ 132 $ 281
MFS/Sun Life Massachusetts Investors Trust Series......................... $ 21 $ 65 $ 112 $ 242
MFS/Sun Life New Discovery Series......................................... $ 28 $ 86 $ 147 $ 311
MFS/Sun Life Total Return Series.......................................... $ 22 $ 69 $ 118 $ 253
MFS/Sun Life Utilities Series............................................. $ 24 $ 74 $ 126 $ 270
OCC Equity Portfolio...................................................... $ 25 $ 76 $ 130 $ 278
OCC Managed Portfolio..................................................... $ 23 $ 67 $ 109 $ 207
OCC Mid Cap Portfolio..................................................... $ 26 $ 79 $ 136 $ 289
OCC Small Cap Portfolio................................................... $ 24 $ 74 $ 127 $ 272
Sun Capital Investment Grade Bond Fund.................................... $ 23 $ 70 $ 120 $ 258
Sun Capital Money Market Fund............................................. $ 22 $ 67 $ 115 $ 248
Sun Capital Real Estate Fund.............................................. $ 28 $ 85 $ 145 $ 308
Warburg Pincus Emerging Markets Portfolio................................. $ 29 $ 90 $ 153 $ 322
Warburg Pincus International Equity Portfolio............................. $ 29 $ 89 $ 151 $ 319
Warburg Pincus Post-Venture Capital Portfolio............................. $ 29 $ 90 $ 153 $ 322
Warburg Pincus Small Company Growth Portfolio............................. $ 27 $ 82 $ 141 $ 298
</TABLE>
THE EXAMPLES SHOULD NOT BE CONSIDERED TO BE REPRESENTATIONS OF PAST OR
FUTURE EXPENSES, AND ACTUAL EXPENSES MAY BE GREATER OR LOWER THAN THOSE SHOWN.
8
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CONDENSED FINANCIAL INFORMATION
Information about the value of the units we use to measure the variable
portion of your Contract ("Variable Accumulation Units") is included in the back
of this Prospectus as Appendix B. This information covers the period from
commencement of operations of the Sub-Accounts on December 9, 1998 through
December 31, 1998.
THE FUTURITY II ANNUITY
Sun Life Assurance Company of Canada (U.S.) (the "Company", "we" or "us")
and Sun Life of Canada (U.S.) Variable Account F (the "Variable Account") offer
the Futurity II Annuity to groups and individuals for use in connection with
their retirement plans. The Contracts are available on a group basis and, in
certain states, may be available on an individual basis. We issue an Individual
Contract directly to the individual owner of the Contract. We issue a Group
Contract to the Owner covering all individuals participating under the Group
Contract. Each individual receives a Certificate that evidences his or her
participation under the Group Contract.
In this Prospectus, unless we state otherwise, we refer to both the owners
of Individual Contracts and participating individuals under Group Contracts as
"Participants" and we address all those Participants as "you"; we use the term
"Contracts" to include Individual Contracts, Group Contracts and Certificates
issued under Group Contracts. For the purpose of determining benefits under both
Individual Contracts and Group Contracts, we establish an Account for each
Participant, which we will refer to as "your" Account or a "Participant
Account."
The Contract provides a number of important benefits for your retirement
planning. It has an Accumulation Phase, during which you make payments under the
Contract and allocate them to one or more Variable Account or Fixed Account
options, and an Income Phase, during which we make payments based on the amount
you have accumulated. The Contract provides tax deferral, so that you do not pay
taxes on your earnings under the Contract until you withdraw them. It provides a
death benefit if you die during the Accumulation Phase. Finally, if you so
elect, during the Income Phase we will make payments to you or someone else for
life or for another period that you choose.
You choose these benefits on a variable or fixed basis or a combination of
both. When you choose variable investment options or a Variable Annuity option,
your benefits will be responsive to changes in the economic environment,
including inflationary forces and changes in rates of return available from
different types of investments. With these options, you assume all investment
risk under the Contract. When you choose a Guarantee Period in our Fixed Account
or a Fixed Annuity option, we assume the investment risk, except in the case of
early withdrawals, where you bear the risk of unfavorable interest rate changes.
You also bear the risk that the interest rates we will offer in the future and
the rates we will use in determining your Fixed Annuity may not exceed our
minimum guaranteed rate, which is 3% per year, compounded annually.
The Contracts are designed for use in connection with retirement and
deferred compensation plans, some of which qualify for favorable federal income
tax treatment under Sections 401, 403, 408 or 408A of the Internal Revenue Code.
The Contracts are also designed so that they may be used in connection with
certain non-tax-qualified retirement plans, such as payroll savings plans and
such other groups (trusteed or nontrusteed) as may be eligible under applicable
law. We refer to Contracts used with plans that receive favorable tax treatment
as "Qualified Contracts," and all others as "Non-Qualified Contracts."
COMMUNICATING TO US ABOUT YOUR CONTRACT
All materials sent to us, including Purchase Payments, must be sent to our
Annuity Service Mailing Address set forth on the first page of this Prospectus.
For all telephone communications, you must call (888) 786-2435 or (617)
348-9600.
Unless this Prospectus states differently, we will consider all materials
sent to us and all telephone communications to be received on the date we
actually receive them at the Annuity Service
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<PAGE>
Mailing Address. However, we will consider Purchase Payments, withdrawal
requests and transfer instructions to be received on the next Business Day if we
receive them (1) on a day that is not a Business Day or (2) after 4:00 p.m.,
Eastern Time.
When we specify that notice to us must be in writing, we reserve the
right, in our sole discretion, to accept notice in another form.
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
We are a stock life insurance company incorporated under the laws of
Delaware on January 12, 1970. We do business in 48 states, the District of
Columbia, and Puerto Rico, and we have an insurance company subsidiary that does
business in New York. Our Executive Office mailing address is One Sun Life
Executive Park, Wellesley Hills, Massachusetts 02481.
We are an indirect wholly-owned subsidiary of Sun Life Assurance Company
of Canada ("Sun Life (Canada)"). Sun Life (Canada) is a mutual life insurance
company incorporated pursuant to Act of Parliament of Canada in 1865 and
currently transacts business in all of the Canadian provinces and territories,
all U.S. states (except New York), the District of Columbia, Puerto Rico, the
Virgin Islands, Great Britain, Ireland, Hong Kong, Bermuda and the Philippines.
THE VARIABLE ACCOUNT
We established the Variable Account as a separate account on July 13,
1989, pursuant to a resolution of our Board of Directors. Under Delaware
insurance law and the Contract, the income, gains or losses of the Variable
Account are credited to or charged against the assets of the Variable Account
without regard to the other income, gains, or losses of the Company. These
assets are held in relation to the Contracts described in this Prospectus and
other variable annuity contracts that provide benefits that vary in accordance
with the investment performance of the Variable Account. Although the assets
maintained in the Variable Account will not be charged with any liabilities
arising out of any other business we conduct, all obligations arising under the
Contracts, including the promise to make annuity payments, are general corporate
obligations of the Company.
The assets of the Variable Account are divided into Sub-Accounts. Each
Sub-Account invests exclusively in shares of a specific Fund. All amounts
allocated to the Variable Account will be used to purchase Fund shares as
designated by you at their net asset value. Any and all distributions made by
the Fund with respect to the shares held by the Variable Account will be
reinvested to purchase additional shares at their net asset value. Deductions
from the Variable Account for cash withdrawals, annuity payments, death
benefits, Account Fees, contract charges against the assets of the Variable
Account for the assumption of mortality and expense risks, administrative
expenses and any applicable taxes will, in effect, be made by redeeming the
number of Fund shares at their net asset value equal in total value to the
amount to be deducted. The Variable Account will be fully invested in Fund
shares at all times.
VARIABLE ACCOUNT OPTIONS:
THE FUNDS
The Contract offers Sub-Accounts that invest in a number of Fund options,
which are briefly discussed below. Each Fund is a mutual fund registered under
the Investment Company Act of 1940, or a separate series of shares of such a
mutual fund.
MORE COMPREHENSIVE INFORMATION ABOUT THE FUNDS, INCLUDING A DISCUSSION OF
THEIR MANAGEMENT, INVESTMENT OBJECTIVES, EXPENSES, AND POTENTIAL RISKS, IS FOUND
IN THE CURRENT PROSPECTUSES FOR THE FUNDS (THE "FUND PROSPECTUSES"). THE FUND
PROSPECTUSES SHOULD BE READ IN CONJUNCTION WITH THIS PROSPECTUS BEFORE YOU
INVEST. A COPY OF EACH FUND PROSPECTUS, AS WELL AS A STATEMENT OF ADDITIONAL
INFORMATION FOR EACH FUND, MAY BE OBTAINED WITHOUT CHARGE FROM THE COMPANY BY
CALLING 1-888-388-8748 (617-348-9600, IN MASSACHUSETTS) OR WRITING TO SUN LIFE
ASSURANCE COMPANY OF CANADA (U.S.), RETIREMENT PRODUCTS AND SERVICES, P.O. BOX
9133, BOSTON MASSACHUSETTS 02117.
10
<PAGE>
The Funds currently available are:
AIM VARIABLE INSURANCE FUNDS, INC. (advised by A I M Advisors, Inc.)
AIM V.I. CAPITAL APPRECIATION FUND seeks growth of capital through
investment in common stocks, with emphasis on medium- and small-sized
growth companies.
AIM V.I. GROWTH FUND seeks growth of capital primarily by investing in
seasoned and better capitalized companies considered to have strong
earnings momentum.
AIM V.I. GROWTH AND INCOME FUND seeks growth of capital with a secondary
objective of current income.
AIM V.I. INTERNATIONAL EQUITY FUND seeks to provide long-term growth of
capital by investing in a diversified portfolio of international equity
securities whose issuers are considered to have strong earnings momentum.
THE ALGER AMERICAN FUND (advised by Fred Alger Management, Inc.)
ALGER AMERICAN GROWTH PORTFOLIO seeks long-term capital appreciation by
investing primarily in equity securities of companies which have market
capitalizations of $1 billion or more.
ALGER AMERICAN INCOME AND GROWTH PORTFOLIO seeks primarily to provide a
high level of dividend income by investing in dividend paying equity
securities. Capital appreciation is a secondary objective.
ALGER AMERICAN SMALL CAPITALIZATION PORTFOLIO seeks long-term capital
appreciation. It invests primarily in the equity securities of small
companies with market capitalizations within the range of the Russell 2000
Growth Index or the S&P SmallCap 600 Index.
GOLDMAN SACHS VARIABLE INSURANCE TRUST (advised by Goldman Sachs Asset
Management, a separate operating division of Goldman, Sachs & Co., except for
Goldman Sachs International Equity Fund, which is advised by Goldman Sachs Asset
Management International, an affiliate of Goldman, Sachs & Co.)
GOLDMAN SACHS VIT CORE LARGE CAP GROWTH FUND seeks long-term growth of
capital through a broadly diversified portfolio of equity securities of
large cap U.S. issuers that are expected to have better prospects for
earnings growth than the growth rate of the general domestic economy.
Dividend income is a secondary consideration.
GOLDMAN SACHS VIT CORE SMALL CAP EQUITY FUND seeks long-term growth of
capital through a broadly diversified portfolio of equity securities of
U.S. issuers which are included in the Russell 2000 Index at the time of
investment.
GOLDMAN SACHS VIT CORE U.S. EQUITY FUND seeks long-term growth of capital
and dividend income through a broadly diversified portfolio of large cap
and blue chip equity securities representing all major sectors of the U.S.
economy.
GOLDMAN SACHS VIT GROWTH AND INCOME FUND seeks long-term growth of capital
and growth of income through investments in equity securities that are
considered to have favorable prospects for capital appreciation and/or
dividend paying ability.
GOLDMAN SACHS VIT INTERNATIONAL EQUITY FUND seeks long-term capital
appreciation through investments in equity securities of companies that are
organized outside the U.S. or whose securities are principally traded
outside the U.S.
J.P. MORGAN SERIES TRUST II (advised by J.P. Morgan Investment Management Inc.)
J.P. MORGAN EQUITY PORTFOLIO seeks to provide a high total return from a
portfolio of selected equity securities.
11
<PAGE>
J.P. MORGAN INTERNATIONAL OPPORTUNITIES PORTFOLIO seeks to provide a high
total return from a portfolio of equity securities of foreign companies.
J.P. MORGAN SMALL COMPANY PORTFOLIO seeks to provide a high total return
from a portfolio of small company stocks.
LORD ABBETT SERIES FUND, INC. (advised by Lord Abbett & Co.)
GROWTH AND INCOME PORTFOLIO seeks to provide long-term growth of capital
and income without excessive fluctuation in market value.
MFS/SUN LIFE SERIES TRUST (advised by Massachusetts Financial Services Company,
an affiliate of the Company)
CAPITAL APPRECIATION SERIES will seek to maximize capital appreciation by
investing in securities of all types, with major emphasis on common stocks.
EMERGING GROWTH SERIES will seek long-term growth of capital.
GOVERNMENT SECURITIES SERIES will seek current income and preservation of
capital by investing in U.S. Government and U.S. Government-related
securities.
HIGH YIELD SERIES will seek high current income and capital appreciation by
investing primarily in certain low rated or unrated fixed income securities
(possibly with equity features) of U.S. and foreign issuers (also known as
"junk bonds").
MASSACHUSETTS INVESTORS GROWTH STOCK SERIES will seek to provide long-term
growth of capital and future income rather than current income.
MASSACHUSETTS INVESTORS TRUST SERIES will seek long-term growth of capital
and future income while providing more current dividend income than is
normally obtainable from a portfolio of only growth stocks.
NEW DISCOVERY SERIES will seek capital appreciation.
TOTAL RETURN SERIES will primarily seek to obtain above-average income
(compared to a portfolio entirely invested in equity securities) consistent
with prudent employment of capital; its secondary objective is to take
advantage of opportunities for growth of capital and income since many
securities offering a better than average yield may also possess growth
potential.
UTILITIES SERIES will seek capital growth and current income (income above
that available from a portfolio invested entirely in equity securities) by
investing under normal market conditions, at least 65% of its assets in
equity and debt securities of both domestic and foreign companies in the
utilities industry.
OCC ACCUMULATION TRUST (advised by OpCap Advisors)
EQUITY PORTFOLIO seeks long-term capital appreciation through investment in
a diversified portfolio of equity securities selected on the basis of a
value oriented approach to investing.
MANAGED PORTFOLIO seeks to achieve growth of capital over time through
investment in a portfolio consisting of common stocks, bonds and cash
equivalents, the percentages of which will vary based on the portfolio
manager's assessments of the relative outlook for such investments.
MID CAP PORTFOLIO seeks long-term capital appreciation through investment
in a diversified portfolio of equity securities. The portfolio will invest
primarily in companies with market capitalizations of between $500 million
and $5 billion.
SMALL CAP PORTFOLIO seeks capital appreciation through investment in a
diversified portfolio of equity securities of companies with market
capitalizations of under $1 billion.
SUN CAPITAL ADVISERS TRUST (advised by Sun Capital Advisers, Inc., an affiliate
of the Company)
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<PAGE>
SUN CAPITAL INVESTMENT GRADE BOND FUND seeks high current income consistent
with relative stability of principal by investing at least 80% of its
assets in investment grade bonds, including those issued by U.S. and
foreign companies (including companies in emerging market countries), the
U.S. Government and its agencies and instrumentalities (including those
which issue mortgage-backed securities), foreign governments (including
those of emerging market countries), and multinational organizations such
as the World Bank. The Fund may invest up to 20% of its assets in lower
rated or unrated bonds (also known as high yield or junk bonds).
SUN CAPITAL MONEY MARKET FUND seeks to maximize current income, consistent
with maintaining liquidity and preserving capital, by investing exclusively
in high quality U.S. dollar-denominated money market securities, including
those issued by U.S. and foreign banks, corporate issuers, the U.S.
Government and its agencies and instrumentalities, foreign governments and
multinational organizations such as the World Bank. The fund may invest in
all types of money market securities, including commercial paper,
certificates of deposit, bankers' acceptances, mortgage-backed and
asset-backed securities, repurchase agreements and other short-term debt
securities.
SUN CAPITAL REAL ESTATE FUND primarily seeks long-term capital growth and,
secondarily, seeks current income and growth of income. The Fund invests at
least 80% of its assets in securities of real estate trusts and other real
estate companies. The Fund generally focuses its investments in equity
REITs, which invest most of their assets directly in U.S. or foreign real
property, receive most of their income from rents and may also realize
gains by selling appreciated properties.
WARBURG PINCUS TRUST (advised by Warburg Pincus Asset Management, Inc.
("Warburg"); Warburg has retained Abbott Capital Management, L.P. regarding
investments in private investment funds for the Post-Venture Capital Portfolio.)
EMERGING MARKETS PORTFOLIO seeks long-term growth of capital by investing
primarily in equity securities of non-United States issuers consisting of
companies in emerging securities markets.
INTERNATIONAL EQUITY PORTFOLIO seeks long-term capital appreciation by
investing in equity securities of non-U.S. issuers.
POST-VENTURE CAPITAL PORTFOLIO seeks long-term growth of capital by
investing primarily in equity securities of issuers in their post-venture
capital stage of development and pursues an aggressive investment strategy.
SMALL COMPANY GROWTH PORTFOLIO seeks capital growth by investing in equity
securities of small-sized domestic companies.
The Funds may also be available to registered separate accounts offering
variable annuity and variable life products of other affiliated and unaffiliated
insurance companies, as well as to the Variable Account and other separate
accounts of the Company. Although we do not anticipate any disadvantages to
this, there is a possibility that a material conflict may arise between the
interests of the Variable Account and one or more of the other separate accounts
participating in the Funds. A conflict may occur due to a change in law
affecting the operations of variable life and variable annuity separate
accounts, differences in the voting instructions of the Participants and Payees
and those of other companies, or some other reason. In the event of conflict, we
will take any steps necessary to protect Participants and Payees, including
withdrawal of the Variable Account from participation in the underlying Funds
which are involved in the conflict or substitution of shares of other Funds.
Certain of the investment advisers to the Funds may reimburse us for
administrative costs in connection with administering the Funds as options under
the Contracts. These amounts are not charged to the Funds or Participants, but
are paid from assets of the advisers.
Certain publically available mutual funds may have similar investment
goals and principal investment policies and risks as one or more of the Funds,
and may be managed by a Fund's portfolio managers(s). While a Fund may have many
similarities to these other funds, its investment performance
13
<PAGE>
will differ from their investment performance. This is due to a number of
differences between a Fund and these similar products, including differences in
sales charges, expense ratios and cash flows.
THE FIXED ACCOUNT
The Fixed Account is made up of all the general assets of the Company
other than those allocated to any separate account. Amounts you allocate to
Guarantee Periods become part of the Fixed Account, and are available to fund
the claims of all classes of our customers, including claims for benefits under
the Contracts.
We will invest the assets of the Fixed Account in those assets we choose
that are allowed by applicable state insurance laws. In general, these laws
permit investments, within specified limits and subject to certain
qualifications, in federal, state and municipal obligations, corporate bonds,
preferred and common stocks, real estate mortgages, real estate and certain
other investments. We intend to invest primarily in investment-grade fixed
income securities (i.e. rated by a nationally recognized rating service within
the four highest grades) or instruments we believe are of comparable quality. We
are not obligated to invest amounts allocated to the Fixed Account according to
any particular strategy, except as may be required by applicable state insurance
laws. You will not have a direct or indirect interest in the Fixed Account
investments.
THE FIXED ACCOUNT OPTIONS:
THE GUARANTEE PERIODS
You may elect one or more Guarantee Period(s) from those we make available
from time to time. We publish Guaranteed Interest Rates for each Guarantee
Period offered. We may change the Guaranteed Interest Rates we offer from time
to time, but no Guaranteed Interest Rate will ever be less than 3% per year,
compounded annually. Also, once we have accepted your allocation to a particular
Guarantee Period, we promise that the Guaranteed Interest Rate applicable to
that allocation will not change for the duration of the Guarantee Period.
We determine Guaranteed Interest Rates in our discretion. We do not have a
specific formula for establishing the rates for different Guarantee Periods. Our
determination will be influenced by the interest rates on fixed income
investments in which we may invest with amounts allocated to the Guarantee
Periods. We will also consider other factors in determining these rates,
including regulatory and tax requirements, sales commissions and administrative
expenses borne by us, general economic trends and competitive factors. We cannot
predict the level of future interest rates.
We may from time to time in our discretion offer interest rate specials
for new Purchase Payments that are higher than the rates we are then offering
for renewals on transfers.
Early withdrawals from your allocation to a Guarantee Period, including
cash withdrawals, transfers, and commencement of an annuity, may be subject to a
Market Value Adjustment, which could decrease or increase the value of your
Account. See "Cash Withdrawals, Withdrawal Charge, and Market Value Adjustment."
THE ACCUMULATION PHASE
During the Accumulation Phase of your Contract, you make payments into
your Account, and your earnings accumulate on a tax-deferred basis. The
Accumulation Phase begins with our acceptance of your first Purchase Payment and
ends the Business Day before your Annuity Commencement Date. The Accumulation
Phase will end sooner if you surrender your Contract or die before the Annuity
Commencement Date.
ISSUING YOUR CONTRACT
When you purchase a Contract, a completed Application and the initial
Purchase Payment are sent to us for acceptance. When we accept an Individual
Contract, we issue the Contract to you. When
14
<PAGE>
we accept a Group Contract, we issue the Contract to the Owner; we issue a
Certificate to you as a Participant when we accept your Application.
We will credit your initial Purchase Payment to your Account within two
business days of receiving your completed Application. If your Application is
not complete, we will notify you. If we do not have the necessary information to
complete the Application within 5 business days, we will send your money back to
you or ask your permission to retain your Purchase Payment until the Application
is made complete. Then we will apply the Purchase Payment within 2 business days
of when the Application is complete.
AMOUNT AND FREQUENCY OF PURCHASE PAYMENTS
The amount of Purchase Payments may vary; however, we will not accept an
initial Purchase Payment of less than $10,000, and each additional Purchase
Payment must be at least $1,000, unless we waive these limits. In addition, we
will not accept a Purchase Payment if your Account Value is over $1 million, or
if the Purchase Payment would cause your Account Value to exceed $1 million,
unless we have approved the Payment in advance. Within these limits, you may
make Purchase Payments at any time during the Accumulation Phase.
ALLOCATION OF NET PURCHASE PAYMENTS
You may allocate your Purchase Payments among the different Sub-Accounts
and Guarantee Periods we offer. At any time, you may have amounts allocated
among up to 18 of the available options.
In your Application, you may specify the percentage of each Purchase
Payment to be allocated to each Sub-Account or Guarantee Period. These
percentages are called your allocation factors. You may change the allocation
factors for future Payments by sending us written notice of the change, on our
required form. We will use your new allocation factors for the first Purchase
Payment we receive with or after we have received notice of the change, and for
all future Purchase Payments, until we receive another change notice.
Although it is currently not our practice, we may deduct applicable
premium or similar taxes from your Purchase Payments. See "Contract Charges --
Premium Taxes." In that case, we will credit your Net Purchase Payment, which is
the Purchase Payment minus the amount of those taxes.
YOUR ACCOUNT
When we accept your first Purchase Payment, we establish an Account for
you, which we maintain throughout the Accumulation Phase of your Contract.
YOUR ACCOUNT VALUE
Your Account Value is the sum of the value of the two components of your
Contract: the Variable Account portion of your Contract ("Variable Account
Value") and the Fixed Account portion of your Contract ("Fixed Account Value").
These two components are calculated separately, as described below.
VARIABLE ACCOUNT VALUE
VARIABLE ACCUMULATION UNITS
In order to calculate your Variable Account Value, we use a measure called
a Variable Accumulation Unit for each Sub-Account. Your Variable Account Value
is the sum of your Account Value in each Sub-Account, which is the number of
your Variable Accumulation Units for that Sub-Account times the value of each
Unit.
15
<PAGE>
VARIABLE ACCUMULATION UNIT VALUE
The value of each Variable Accumulation Unit in a Sub-Account reflects the
net investment performance of that Sub-Account. We determine that value once on
each day that the New York Stock Exchange is open for trading (a "Business
Day"), at the close of trading, which is currently 4:00 p.m., Eastern Time. The
period that begins at the time Variable Accumulation Units are valued on a
Business Day and ends at that time on the next Business Day is called a
Valuation Period. On days other than Business Days, the value of a Variable
Accumulation Unit does not change.
To measure these values, we use a factor -- which we call the Net
Investment Factor-- which represents the net return on the Sub-Account's assets.
At the end of any Valuation Period, the value of a Variable Accumulation Unit
for a Sub-Account is equal to the value of that Sub-Account's Variable
Accumulation Units at the end of the previous Valuation Period, multiplied by
the Net Investment Factor. We calculate the Net Investment Factor by dividing
(1) the net asset value of a Fund share held in the Sub-Account at the end of
that Valuation Period, plus the per share amount of any dividend or capital
gains distribution made by that Fund during the Valuation Period, by (2) the net
asset value per share of the Fund share at the end of the previous Valuation
Period; we then deduct a factor representing the mortality and expense risk
charge and administrative expense charge. See "Contract Charges."
For a hypothetical example of how we calculate the value of a Variable
Accumulation Unit, see the Statement of Additional Information.
CREDITING AND CANCELING VARIABLE ACCUMULATION UNITS
When we receive an allocation to a Sub-Account, either from a Net Purchase
Payment or a transfer of Account Value, we credit that amount to your Account in
Variable Accumulation Units. Similarly, we cancel Variable Accumulation Units
when you transfer or withdraw amounts from a Sub-Account, or when we deduct
certain charges under the Contract. We determine the number of Units credited or
canceled by dividing the dollar amount by the Variable Accumulation Unit value
for that Sub-Account at the end of the Valuation Period during which the
transaction or charge is effective.
FIXED ACCOUNT VALUE
Your Fixed Account value is the sum of all amounts allocated to Guarantee
Periods, either from Net Purchase Payments, transfers or renewals, plus interest
credited on those amounts, and minus withdrawals, transfers out of Guarantee
Periods, and any deductions for charges under the Contract taken from your Fixed
Account Value.
CREDITING INTEREST
We credit interest on amounts allocated to a Guarantee Period at the
applicable Guaranteed Interest Rate for the duration of the Guarantee Period.
The Guarantee Period begins the day we apply your allocation and ends when the
number of calendar years (or months if the Guarantee Period is less than one
year) in the Guarantee Period (measured from the end of the calendar month in
which the amount was allocated to the Guarantee Period) have elapsed. The last
day of the Guarantee Period is its Expiration Date. During the Guarantee Period,
we credit interest daily at a rate that yields the Guaranteed Interest Rate on
an annual effective basis.
GUARANTEE AMOUNTS
Each separate allocation you make to a Guarantee Period, together with
interest credited thereon, is called a Guarantee Amount. Each Guarantee Amount
is treated separately for purposes of determining the Market Value Adjustment.
RENEWALS
We will notify you in writing between 45 and 75 days before the Expiration
Date for any Guarantee Amount. A new Guarantee Period of the same duration will
begin automatically for that Guarantee Amount on the first day following the
Expiration Date, unless before the Expiration Date
16
<PAGE>
we receive (1) written notice from you electing a different Guarantee Period
from among those we then offer or (2) instructions to transfer all or some of
the Guarantee Amount to one or more Sub-Accounts, in accordance with the
transfer privilege provisions of the Contract. Each new allocation to a
Guarantee Period must be at least $1,000.
EARLY WITHDRAWALS
If you withdraw, transfer, or annuitize an allocation to a Guarantee
Period before the Expiration Date, we will apply a Market Value Adjustment to
the transaction. This could result in an increase or decrease of your Account
Value, depending on interest rates at the time. You bear the risk that you will
receive less than your principal if the Market Value Adjustment applies.
TRANSFER PRIVILEGE
PERMITTED TRANSFERS
During the Accumulation Phase, you may transfer all or part of your
Account Value to one or more Sub-Accounts or Guarantee Periods then available,
subject to the following restrictions:
- you may not make more than 12 transfers in any Account Year;
- the amount transferred from a Sub-Account must be at least $1,000
unless you are transferring your entire balance in that Sub-Account;
- your Account Value remaining in a Sub-Account must be at least $1,000;
- the amount transferred from a Guarantee Period must be the entire
Guarantee Amount, except for transfers of interest credited during the
current Account Year;
- at least 30 days must elapse between transfers to or from Guarantee
Periods;
- transfers to or from Sub-Accounts are subject to terms and conditions
that may be imposed by the Fund; and
- we impose additional restrictions on market timers, which are further
described below.
These restrictions do not apply to transfers made under an approved dollar
cost averaging program.
There is usually no charge imposed on transfers; however, we reserve the
right to impose a transfer charge of $15 for each transfer. Transfers out of a
Guarantee Period more than 30 days before expiration of the period will be
subject to the Market Value Adjustment described below. Under current law there
is no tax liability for transfers.
REQUESTS FOR TRANSFERS
You may request transfers in writing or by telephone. The telephone
transfer privilege is available automatically, and does not require your written
election. We will require personal identifying information to process a request
for transfer made by telephone. We will not be liable for following instructions
communicated by telephone that we reasonably believe are genuine.
If we receive your transfer request before 4:00 p.m. Eastern Time on a
Business Day, it will be effective that day. Otherwise, it will be effective the
next Business Day.
MARKET TIMERS
The Contracts are not designed for professional market timing
organizations or other entities using programmed and frequent transfers. If you
wish to employ such strategies, you should not purchase a Contract. Accordingly,
transfers may be subject to restrictions if exercised by a market timing firm or
any other third party authorized to initiate transfer transactions on behalf of
multiple Participants. In imposing such restrictions, we may, among other
things, not accept (1) the transfer instructions of any agent acting under a
power of attorney on behalf of more than one Participant, or (2) the
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transfer instructions of individual Participants who have executed preauthorized
transfer forms that are submitted at the same time by market timing firms or
other third parties on behalf of more than one Participant. We will not impose
these restrictions unless our actions are reasonably intended to prevent the use
of such transfers in a manner that will disadvantage or potentially impair the
Contract rights of other Participants.
In addition, some of the Funds have reserved the right to temporarily or
permanently refuse exchange requests from the Variable Account if, in the
judgment of the Fund's investment advisor, the Fund would be unable to invest
effectively in accordance with its investment objective and policies, or would
otherwise potentially be adversely affected. In particular, a pattern of
exchanges that coincide with a market timing strategy may be disruptive to a
Fund and therefore may be refused. Accordingly, the Variable Account may not be
in a position to effectuate transfers and may refuse transfer requests without
prior notice. We also reserve the right, for similar reasons, to refuse or delay
exchange requests involving transfers to or from the Fixed Account.
WAIVERS; REDUCED CHARGES; CREDITS; BONUS GUARANTEED INTEREST RATES
We may reduce or waive the withdrawal charge or Account Fee, credit
additional amounts, or grant bonus Guaranteed Interest Rates in certain
situations. These situations may include sales of Contracts (1) where selling
and/or maintenance costs associated with the Contracts are reduced, such as the
sale of several Contracts to the same Participant, sales of large Contracts, and
certain group sales, and (2) to officers, directors and employees of the Company
or its affiliates, registered representatives and employees of broker-dealers
with a current selling agreement with the Company and affiliates of such
representatives and broker-dealers, employees of affiliated asset management
firms, and persons who have retired from such positions ("Eligible Employees")
and immediate family members of Eligible Employees. Eligible Employees and their
immediate family members may also purchase a Contract without regard to minimum
Purchase Payment requirements. For other situations in which withdrawal charges
may be waived, see "Withdrawals, Withdrawal Charge and Market Value Adjustment."
OPTIONAL PROGRAMS
DOLLAR COST AVERAGING
Dollar cost averaging allows you to invest gradually, over time, in up to
12 Sub-Accounts. You may select a dollar cost averaging program at no extra
charge by allocating a minimum of $1,000 to a designated Sub-Account or to a
Guarantee Period we make available in connection with the program. Amounts
allocated to the Fixed Account under the program will earn interest at a rate
declared by the Company for the Guarantee Period you select. Each month or
quarter, as you select, we will transfer the same amount automatically to one or
more Sub-Accounts that you choose, up to a maximum of 12 Sub-Accounts. The
program continues until your Account Value allocated to the program is depleted
or you elect to stop the program. The final amount transferred from the Fixed
Account will include all interest earned.
Only Purchase Payments may be allocated to a dollar cost averaging
program. Previously applied amounts may not be transferred to a dollar cost
averaging program.
No Market Value Adjustment (either positive or negative) will apply to
amounts automatically transferred from the Fixed Account under the dollar cost
averaging program, except that if you discontinue or alter the program prior to
completion, amounts remaining in the Fixed Account will be transferred to the
Sun Capital Money Market Fund Sub-Account, unless you instruct us otherwise, and
the Market Value Adjustment will be applied. Any new allocation of a Purchase
Payment to the program will be treated as commencing a new dollar cost averaging
program and is subject to the $1,000 minimum.
The main objective of a dollar cost averaging program is to minimize the
impact of short-term price fluctuations on Account Value. Since you transfer the
same dollar amount to the variable investment options at set intervals, dollar
cost averaging allows you to purchase more Variable Accumulation Units (and,
indirectly, more Fund shares) when prices are low and fewer Variable
Accumulation Units
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<PAGE>
(and, indirectly, fewer Fund shares) when prices are high. Therefore, you may
achieve a lower average cost per Variable Accumulation Unit over the long term.
A dollar cost averaging program allows you to take advantage of market
fluctuations. However, it is important to understand that a dollar cost
averaging program does not assure a profit or protect against loss in a
declining market.
ASSET ALLOCATION
One or more asset allocation programs may be available in connection with
the Contracts, at no extra charge. Asset allocation is the process of investing
in different asset classes -- such as equity funds, fixed income funds, and
money market funds -- depending on your personal investment goals, tolerance for
risk, and investment time horizon. By spreading your money among a variety of
asset classes, you may be able to reduce the risk and volatility of investing,
although there are no guarantees, and asset allocation does not insure a profit
or protect against loss in declining market.
Currently, you may select one of three asset allocation models, each of
which represents a combination of Sub-Accounts with a different level of risk.
The available models are the conservative asset allocation model, the moderate
asset allocation model, and the aggressive asset allocation model. Each model
allocates a different percentage of Account Value to Sub-Accounts investing in
the various asset classes, with the conservative model allocating the lowest
percentage to Sub-Accounts investing in the equity asset class and the
aggressive model allocating the highest percentage to the stock asset class.
These models, as well as the terms and conditions of the asset allocation
program, are fully described in a separate brochure. Additional programs may be
available in the future.
If you elect an asset allocation program, we will automatically allocate
your Purchase Payments among the Sub-Accounts represented in the model you
choose. By your election of an asset allocation program, your thereby authorize
us to automatically reallocate your Account Value on a quarterly basis to
reflect the current composition of the model you have selected, without further
instruction, until we receive notification that you wish to terminate the
program, or choose a different model.
SYSTEMATIC WITHDRAWAL PROGRAM
If you have an Account Value of $10,000 or more, you may select our
Systematic Withdrawal or Interest Out Program.
Under the Systematic Withdrawal Program, you determine the amount and
frequency of regular withdrawals you would like to receive from your Fixed
and/or Variable Account Value and we will effect them automatically. You may
change or stop the Systematic Withdrawal Program at any time, by written notice
to us. Withdrawals may be included in income and subject to a 10% federal tax
penalty, as well as all charges and any Market Value Adjustment applicable upon
withdrawal. You should consult your adviser before choosing this option.
PORTFOLIO REBALANCING PROGRAM
Under the Portfolio Rebalancing Program, we transfer funds among the
Sub-Accounts to maintain the percentage allocation you have selected among these
Sub-Accounts. At your election, we will make these transfers on a quarterly,
semi-annual or annual basis.
Portfolio Rebalancing does not permit transfers to or from any Guarantee
Period.
WITHDRAWALS, WITHDRAWAL CHARGE AND MARKET VALUE ADJUSTMENT
CASH WITHDRAWALS
REQUESTING A WITHDRAWAL
At any time during the Accumulation Phase you may withdraw in cash all or
any portion of your Account Value. To make a withdrawal, you must send us a
written request at our Annuity Service Mailing Address. Your request must
specify whether you want to withdraw the entire amount of your Account or, if
less, the amount you wish to withdraw.
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All withdrawals may be subject to a withdrawal charge (see "Withdrawal
Charge" below) and withdrawals from your Fixed Account Value also may be subject
to a Market Value Adjustment (see "Market Value Adjustment" below). Upon request
we will notify you of the amount we would pay in the event of a full or partial
withdrawal. Withdrawals also may have adverse federal income tax consequences,
including a 10% penalty tax. See "Federal Tax Status." You should carefully
consider these tax consequences before requesting a cash withdrawal.
FULL WITHDRAWALS
If you request a full withdrawal, we calculate the amount we will pay you
as follows. We start with the total value of your Account at the end of the
Valuation Period during which we receive your withdrawal request; we deduct the
Account Fee for the Account Year in which the withdrawal is made; we add or
subtract the amount of any Market Value Adjustment applicable to your Fixed
Account Value; and finally, we deduct any applicable withdrawal charge.
A full withdrawal results in the surrender of your Contract, and
cancellation of all rights and privileges under your Contract.
PARTIAL WITHDRAWALS
If you request a partial withdrawal we will pay you the actual amount
specified in your request and then reduce the value of your Account by deducting
the amount paid, adding or deducting any Market Value Adjustment applicable to
amounts withdrawn from the Fixed Account, and deducting any applicable
withdrawal charge.
You may specify the amount you want withdrawn from each Sub-Account and/or
Guarantee Amount to which your Account is allocated. If you do not so specify,
we will deduct the total amount you request pro rata, based on your allocations
at the end of the Valuation Period during which we receive your request.
If you request a partial withdrawal that would result in your Account
Value being reduced to an amount less than the Account Fee for the Account Year
in which you make the withdrawal, we will treat it as a request for a full
withdrawal.
TIME OF PAYMENT
We will pay you the applicable amount of any full or partial withdrawal
within 7 days after we receive your withdrawal request, except in cases where we
are permitted to defer payment under the Investment Company Act of 1940 and
applicable state insurance law. Currently, we may defer payment of amounts you
withdraw from the Variable Account only for following periods:
- when the New York Stock Exchange is closed except weekends and holidays
or when trading on the New York Stock Exchange is restricted;
- when it is not reasonably practical to dispose of securities held by a
Fund or to determine the value of the net assets of a Fund, because an
emergency exists; or
- when an SEC order permits us to defer payment for the protection of
Participants.
We also may defer payment of amounts you withdraw from the Fixed Account for up
to six months from the date we receive your withdrawal request. We do not pay
interest on the amount of any payments we defer.
WITHDRAWAL RESTRICTIONS FOR QUALIFIED PLANS
If yours is a Qualified Contract, you should carefully check the terms of
the plan for limitations and restrictions on cash withdrawals.
Special restrictions apply to withdrawals from Contracts used for Section
403(b) annuities. See "Federal Tax Status -- Tax-Sheltered Annuities."
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WITHDRAWAL CHARGE
We do not deduct any sales charge from your Purchase Payments when they
are made. However, we may impose a withdrawal charge (known as a "contingent
deferred sales charge") on certain amounts you withdraw. We impose this charge
to defray some of our expenses related to the sale of the Contracts, such as
commissions we pay to agents, the cost of sales literature, and other
promotional costs and transaction expenses.
FREE WITHDRAWAL AMOUNT
In each Account Year you may withdraw a portion of your Account Value --
which we call the "free withdrawal amount" -- before incurring the withdrawal
charge. For any year, the free withdrawal amount is equal to (1) 10% of the
amount of all Purchase Payments you have made during the last 7 Account Years,
including the current Account Year (the "Annual Withdrawal Allowance"), plus (2)
the amount of all Purchase Payments made before the last 7 Account Years that
you have not previously withdrawn. Any portion of the Annual Withdrawal
Allowance that you do not use in an Account Year is cumulative; that is, it is
carried forward and available for use in future years.
For convenience, we refer to Purchase Payments made during the last 7
Account Years (including the current Account Year) as "New Payments," and all
Purchase Payments made before the last 7 Account Years as "Old Payments."
For example, assume you wish to make a withdrawal from your Contract in
Account Year 10. You made an initial Purchase Payment of $10,000 in Account Year
1, you made one additional Purchase Payment of $8,000 in Account Year 8, and you
have made no previous withdrawals. Your Account Value in Account Year 10 is
$35,000. The free withdrawal amount for Account Year 10 is $19,400, calculated
as follows:
- $800, which is the Annual Withdrawal Allowance for Account Year 10 (10%
of the $8,000 Purchase Payment made in Account Year 8, the only New
Payment); plus
- $8,600, which is the total of the unused Annual Withdrawal Allowances
of $1,000 for each of Account Years 1 through 7 and $800 for each of
Account Years 8 and 9 that are carried forward and available for use in
Account Year 10; plus
- $10,000, which is the amount of all Old Payments that you have not
previously withdrawn.
WITHDRAWAL CHARGE ON PURCHASE PAYMENTS
If you withdraw more than the free withdrawal amount in any Account Year,
we consider the excess amount to be withdrawn first from New Payments that you
have not previously withdrawn. We impose the withdrawal charge on the amount of
these New Payments. Thus, the maximum amount on which we will impose the
withdrawal charge in any year will never be more than the total of all New
Payments that you have not previously withdrawn.
The amount of your withdrawal, if any, that exceeds the total of the free
withdrawal amount plus the aggregate amount of all New Payments not previously
withdrawn, is not subject to the withdrawal charge.
ORDER OF WITHDRAWAL
New Payments are withdrawn on a first-in first-out basis until all New
Payments have been withdrawn. For example, assume the same facts as in the
example above. In Account Year 10 you wish to withdraw $25,000. We attribute the
withdrawal first to the free withdrawal amount of $19,400, which is not subject
to the withdrawal charge. The remaining $5,600 is withdrawn from the Purchase
Payment made in Account Year 8 (the only New Payment) and is subject to the
withdrawal charge. The $2,400 balance of the Account Year 8 Purchase Payment
will remain in your Account. If you make a subsequent $5,000 withdrawal in
Account Year 10, $2,400 of that amount will be withdrawn from the remainder of
the Account Year 8 Purchase Payment and will be subject to the withdrawal
charge. The
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other $2,600 of your withdrawal (which exceeds the amount of all New Payments
not previously withdrawn) will not be subject to the withdrawal charge.
CALCULATION OF WITHDRAWAL CHARGE
We calculate the amount of the withdrawal charge by multiplying the
Purchase Payments you withdraw by a percentage. The percentage varies according
to the number of Account Years the Purchase Payment has been held in your
Account, including the year in which you made the Payment, but not the year you
withdraw it. The applicable percentages are as follows:
<TABLE>
<CAPTION>
NUMBER OF
ACCOUNT YEARS PERCENTAGE
- -------------- ---------------
<S> <C>
0-1 6%
2-3 5%
4-5 4%
6 3%
7 or more 0%
</TABLE>
For example, again using the same facts as in the example above, the
percentage applicable to the withdrawals in Account Year 10 of Purchase Payments
made in Account Year 8 would be 5%, because the number of Account Years the
Purchase Payments have been held in your Account would be two.
The withdrawal charge will never be greater than 6% of the aggregate
amount of Purchase Payments you make under the Contract.
For a Group Contract, we may modify the withdrawal charges and limits,
upon notice to the Owner of the Group Contract. However, any modification will
only apply to Accounts established after the date of the modification.
For additional examples of how we calculate withdrawal charges, please see
Appendix C.
TYPES OF WITHDRAWALS NOT SUBJECT TO WITHDRAWAL CHARGE
We do not impose a withdrawal charge on withdrawals from the Accounts of
(a) our employees, (b) employees of our affiliates, or (c) licensed insurance
agents who sell the Contracts. We also may waive withdrawal charges with respect
to Purchase Payments derived from the surrender of other annuity contracts we
issue.
If approved in your state, we will waive the withdrawal charge for a full
withdrawal if (a) at least one year has passed since we issued your Contract and
(b) you are confined to an eligible nursing home and have been confined there
for at least the preceding 180 days, or any shorter period required by your
state. An "eligible nursing home" means a licensed hospital or licensed skilled
or intermediate care nursing facility at which medical treatment is available on
a daily basis and daily medical records are kept for each patient. You must
provide us evidence of confinement in the form we determine.
For each Qualified Contract, the free withdrawal amount in any Account
Year will be the greater of the free withdrawal amount described above and any
amounts required to be withdrawn to comply with the minimum distribution
requirement of the Internal Revenue Code. This applies only to the portion of
the required minimum distribution attributable to that Qualified Contract.
We do not impose the withdrawal charge on amounts you apply to provide an
annuity, amounts we pay as a death benefit, or amounts you transfer among the
Sub-Accounts, between the Sub-Accounts and the Fixed Account, or within the
Fixed Account.
MARKET VALUE ADJUSTMENT
We will apply a market value adjustment if you withdraw or transfer
amounts from your Fixed Account Value more than 30 days before the end of the
applicable Guarantee Period. For this purpose, using Fixed Account Value to
provide an annuity is considered a withdrawal, and the Market Value
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Adjustment will apply. However, we will not apply the Market Value Adjustment to
automatic transfers to a Sub-Account from a Guarantee Period as part of our
dollar cost averaging program.
We apply the Market Value Adjustment separately to each Guarantee Amount
in the Fixed Account, that is to each separate allocation you have made to a
Guarantee Period together with interest credited on that allocation. However, we
do not apply the adjustment to the amount of interest credited during your
current Account Year. Any withdrawal from a Guarantee Amount is attributed first
to such interest.
A Market Value Adjustment may decrease, increase or have no effect on your
Account Value. This will depend on changes in interest rates since you made your
allocation to the Guarantee Period and the length of time remaining in the
Guarantee Period. In general, if the Guaranteed Interest Rate we currently
declare for Guarantee Periods equal to the balance of your Guarantee Period (or
your entire Guarantee Period for Guarantee Periods of less than one year) is
higher than your Guaranteed Interest Rate, the Market Value Adjustment is likely
to decrease your Account Value. If our current Guaranteed Interest Rate is
lower, the Market Value Adjustment is likely to increase your Account Value.
We determine the amount of the Market Value Adjustment by multiplying the
amount that is subject to the adjustment by the following formula:
<TABLE>
<S> <C>
N/12
1 + I
( -------- ) -1
1 + J + b
</TABLE>
where:
I is the Guaranteed Interest Rate applicable to the Guarantee Amount from
which you withdraw, transfer or annuitize;
J is the Guaranteed Interest Rate we declare at the time of your
withdrawal, transfer or annuitization for Guarantee Periods equal to the length
of time remaining in the Guarantee Period applicable to your Guarantee Amount,
rounded to the next higher number of complete years, for Guarantee Periods of
one year or more. For any Guarantee Periods of less than one year, J is the
Guaranteed Interest Rate we declare at the time of your withdrawal, transfer or
annuitization for a Guarantee Period of the same length as your Guarantee
Period. If, at that time, we do not offer the applicable Guarantee Period we
will use an interest rate determined by straight-line interpolation of the
Guaranteed Interest Rates for the Guarantee Periods we do offer;
N is the number of complete months remaining in your Guarantee Period; and
b is a factor that currently is 0% but that in the future we may increase
to up to 0.25%. Any increase would be applicable only to Participants who
purchase their Contracts after the date of that increase.
We will apply the Market Value Adjustment to the amount being withdrawn
after deduction of any Account Fee, if applicable, but before we impose any
withdrawal charge on the amount withdrawn.
For examples of how we calculate the Market Value Adjustment, see Appendix
C.
No Market Value Adjustment will apply to Contracts issued in the states of
Maryland, Texas and Washington, or to one-year Guarantee Periods under Contracts
issued in the state of Oregon.
CONTRACT CHARGES
ACCOUNT FEE
Each year during the Accumulation Phase of your Contract we will deduct
from your Account an Account Fee to help cover the administrative expenses we
incur related to the issuance of Contracts and the maintenance of Accounts. We
deduct the Account Fee on each Account Anniversary, which is the anniversary of
the first day of the month after we issue your Contract. In Account Years 1
through 5, the Account Fee is equal to the lesser of (a) $35 and (b) 2% of your
Account Value. After Account Year 5, we may change the Account Fee each year,
but the Account Fee will never exceed the lesser of
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(a) $50 and (b) 2% of your Account Value. We deduct the Account Fee pro rata
from each Sub-Account and each Guarantee Amount, based on the allocation of your
Account Value on your Account Anniversary.
We will not charge you the Account Fee if:
(1) your Account has been allocated only to the Fixed Account during the
applicable Account Year; or
(2) your Account Value is more than $75,000 on your Account Anniversary.
If you make a full withdrawal of your Account, we will deduct the full
amount of the Account Fee at the time of the withdrawal. In addition, on the
Annuity Commencement Date we will deduct a pro rata portion of the Account Fee
to reflect the time elapsed between the last Account Anniversary and the day
before the Annuity Commencement Date.
After the Annuity Commencement Date, we will deduct an annual Account Fee
of $35 in the aggregate in equal amounts from each Variable Annuity payment we
make during the year. We do not deduct any fee from Fixed Annuity payments.
ADMINISTRATIVE EXPENSE CHARGE
We deduct an administrative expense charge from the assets of the Variable
Account at an annual effective rate equal to 0.15% during both the Accumulation
Phase and the Income Phase. This charge is designed to reimburse expenses we
incur in administering the Contracts, the Accounts and the Variable Account that
are not covered by the Account Fee.
MORTALITY AND EXPENSE RISK CHARGE
We deduct a mortality and expense charge from the assets of the Variable
Account at an effective annual rate equal to 1.25% during both the Accumulation
Phase and the Income Phase. The mortality risk we assume arises from our
contractual obligation to continue to make annuity payments to each Annuitant,
regardless of how long the Annuitant lives and regardless of how long all
Annuitants as a group live. This obligation assures each Annuitant that neither
the longevity of fellow Annuitants nor an improvement in life expectancy
generally will have an adverse effect on the amount of any annuity payment
received under the contract. The expense risk we assume is the risk that the
Account Fee and administrative expense charge we assess under the Contracts may
be insufficient to cover the actual total administrative expenses we incur. If
the amount of the charge is insufficient to cover the mortality and expense
risks, we will bear the loss. If the amount of the charge is more than
sufficient to cover the risks, we will make a profit on the charge. We may use
this profit for any proper corporate purpose, including the payment of marketing
and distribution expenses for the Contracts.
PREMIUM TAXES
Some states and local jurisdictions impose a premium tax on us that is
equal to a specified percentage of the Purchase Payments you make. In many
states there is no premium tax. We believe that the amounts of applicable
premium taxes currently range from 0% to 3.5%. You should consult a tax adviser
to find out if your state imposes a premium tax and the amount of any tax.
In order to reimburse us for the premium tax we may pay on Purchase
Payments, our policy is to deduct the amount of such taxes from the amount you
apply to provide an annuity at the time of annuitization. However, we reserve
the right to deduct the amount of any applicable tax from your Account at any
time, including at the time you make a Purchase Payment or make a full or
partial withdrawal. We do not make any profit on the deductions we make to
reimburse premium taxes.
FUND EXPENSES
There are fees and charges deducted from each Fund. These fees and
expenses are described in the Fund's Prospectus and Statement of Additional
Information.
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MODIFICATION IN THE CASE OF GROUP CONTRACTS
For Group Contracts, we may modify the Account Fee, the administrative
expense charge and the mortality and expense risk charge upon notice to Owners.
However, such modification will apply only with respect to Participant Accounts
established after the effective date of the modification.
DEATH BENEFIT
If you die during the Accumulation Phase, we will pay a death benefit to
your Beneficiary, using the payment method elected (a single cash payment or one
of our Annuity Options). If the Beneficiary is not living on the date of death,
we will pay the death benefit in one sum to your estate. We do not pay a death
benefit if you die during the Income Phase. However, the Beneficiary will
receive any payments provided under an Annuity Option that is in effect.
If your spouse is your Beneficiary, upon your death your spouse may elect
to continue the Contract as the Participant, rather than receive the death
benefit. In that case, the amount of your death benefit, calculated as described
below, will become the Contract's Account Value on the Death Benefit Date. All
other provisions, including any withdrawal charges, will continue as if your
spouse had purchased the Contract on the original date of coverage.
AMOUNT OF DEATH BENEFIT
To calculate the amount of your death benefit, we use a "Death Benefit
Date." The Death Benefit Date is the date we receive proof of your death in an
acceptable form ("Due Proof of Death") if you have elected a death benefit
payment method before your death and it remains effective. Otherwise, the Death
Benefit Date is the later of the date we receive Due Proof of Death or, the date
we receive the Beneficiary's election of either payment method or, if the
Beneficiary is your spouse, Contract continuation. If we do not receive the
Beneficiary's election within 60 days after we receive Due Proof of Death, the
Death Benefit Date will be the last day of the 60 day period.
The amount of the death benefit is determined as of the Death Benefit
Date.
If you were 85 or younger on your Contract Date (the date we accepted your
first Purchase Payment), the death benefit will be the greatest of the following
amounts:
1. Your Account Value for the Valuation Period during which the Death
Benefit Date occurs;
2. The amount we would pay if you had surrendered your entire Account on
the Death Benefit Date;
3. Your Account Value on the Seven-Year Anniversary immediately before
the Death Benefit Date, adjusted for subsequent Purchase Payments and
partial withdrawals and charges made between the Seven-Year
Anniversary and the Death Benefit Date;
4. Your highest Account Value on any Account Anniversary before your 81st
birthday, adjusted for subsequent Purchase Payments and partial
withdrawals and charges made between that Account Anniversary and the
Death Benefit Date; and
5. Your total Purchase Payments plus the following interest accruals,
adjusted for partial withdrawals; interest will accrue on Purchase
Payments allocated to and transfers to the Variable Account while they
remain in the Variable Account at 5% per year until the first day of
the month following your 80th birthday, or until the Purchase Payment
or amount transferred has doubled in amount, whichever is earlier.
If you were 86 or older on your Contract Date, the death benefit is equal
to amount (2) above; because this amount will reflect any applicable withdrawal
charges and market value adjustment, it may be less than your Account Value.
In calculating the death benefit amount payable under (3), (4), and (5),
any partial withdrawals will reduce the amount by the ratio of the Account Value
immediately following the withdrawal to the Account Value immediately before the
withdrawal.
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<PAGE>
If the death benefit is amount (2), (3), (4), or (5), your Account Value
will be increased by the excess, if any, of that amount over amount (1). Any
such increase will be allocated to the Sub-Accounts in proportion to your
Account Value in those Sub-Accounts on the Death Benefit Date. Also, any portion
of this new Account Value attributed to the Fixed Account will be transferred to
the Sun Capital Money Market Sub-Account (without the application of a Market
Value Adjustment). The Beneficiary may then transfer to the Fixed Account and
begin a new Guarantee Period.
METHOD OF PAYING DEATH BENEFIT
The death benefit may be paid in a single cash payment or as an annuity
(either fixed, variable or a combination), under one or more of our Annuity
Options. We describe the Annuity Options in this Prospectus under "Income Phase
- -- Annuity Provisions."
During the Accumulation Phase, you may elect the method of payment for the
death benefit. If no such election is in effect on the date of your death, the
Beneficiary may elect either a single cash payment or an annuity. With respect
to a Non-Qualified Contract, if the Beneficiary is the Owner's spouse, the
Beneficiary may elect to continue the Non-Qualified Contract. These elections
are made by sending us a completed election form, which we will provide. If we
do not receive the Beneficiary's election within 60 days after we receive Due
Proof of Death, we will pay the death benefit in a single cash payment.
If we pay the death benefit in the form of an Annuity Option, the
Beneficiary becomes the Annuitant under the terms of that Annuity Option.
NON-QUALIFIED CONTRACTS
If your Contract is a Non-Qualified Contract, special distribution rules
apply to the payment of the death benefit. The amount of the death benefit must
be distributed either (1) as a lump sum within 5 years after your death or (2)
if in the form of an annuity, over a period not greater than the life or
expected life of the "designated beneficiary" within the meaning of Section
72(s) of the Internal Revenue Code, with payments beginning no later than one
year after your death.
The person you have named a Beneficiary under your Contract, if any, will
be the "designated beneficiary." If the named Beneficiary is not living, the
Annuitant automatically becomes the designated beneficiary.
If the designated beneficiary is your surviving spouse, your spouse may
continue the Contract in his or her own name as Participant. To make this
election, your spouse must give us written notification within 60 days after we
receive Due Proof of Death. In that case, we will not pay a death benefit, and
the Account Value will be increased to reflect the death benefit calculation.
The special distribution rules will then apply on the death of your spouse.
During the Income Phase, if the Annuitant dies, the remaining value of the
Annuity Option in place must be distributed at least as rapidly as the method of
distribution under that option.
If the Participant is not a natural person, these distribution rules apply
on a change in, or the death of, any Annuitant or Co-Annuitant.
Payments made in contravention of these special rules would adversely
affect the treatment of the Contracts as annuity contracts under the Internal
Revenue Code. Neither you nor the Beneficiary may exercise rights that would
have that effect.
SELECTION AND CHANGE OF BENEFICIARY
You select your Beneficiary in your Application. You may change your
Beneficiary at any time by sending us written notice on our required form,
unless you previously made an irrevocable Beneficiary designation. A new
Beneficiary designation is not effective until we record the change.
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PAYMENT OF DEATH BENEFIT
Payment of the death benefit in cash will be made within 7 days of the
Death Benefit Date, except if we are permitted to defer payment in accordance
with the Investment Company Act of 1940. If an Annuity Option is elected, the
Annuity Commencement Date will be the first day of the second calendar month
following the Death Benefit Date, and your Account will remain in effect until
the Annuity Commencement Date.
DUE PROOF OF DEATH
We accept the following as proof of any person's death:
- an original certified copy of an official death certificate;
- an original certified copy of a decree of a court of competent
jurisdiction as to the finding of death; or
- any other proof we find satisfactory.
THE INCOME PHASE -- ANNUITY PROVISIONS
During the Income Phase, we make regular monthly payments to your
Annuitant.
The Income Phase of your Contract begins with the Annuity Commencement
Date. On that date, we apply your Account Value, adjusted as described below,
under the Annuity Option or Options you have selected, and we make the first
payment.
Once the Income Phase begins, no lump sum settlement option or cash
withdrawals are permitted, except pursuant to Annuity Option D, Monthly Payments
for a Specified Period Certain, as described below under the heading "Annuity
Options," and you cannot change the Annuity Option selected. You may request a
full withdrawal before the Annuity Commencement Date, which will be subject to
all charges applicable on withdrawals. See "Cash Withdrawals, Withdrawal Charge
and Market Value Adjustment."
SELECTION OF THE ANNUITANT OR CO-ANNUITANT
You select the Annuitant in your Application. The Annuitant is the person
who receives payments during the Income Phase and on whose life these payments
are based. In your Contract, the Annuity Options refer to the Annuitant as the
"Payee." If you name someone other than yourself as Annuitant and the Annuitant
dies before the Income Phase, you become the Annuitant.
In a Non-Qualified Contract, if you name someone other than yourself as
Annuitant, you may also select a Co-Annuitant, who will become the new Annuitant
if the original Annuitant dies before the Income Phase (if both the Annuitant
and Co-Annuitant die before the Income Phase, you become the Annuitant). If you
have named both an Annuitant and a Co-Annuitant, you may designate one of them
to become the sole Annuitant as of the Annuity Commencement Date, if both are
living at that time. If you have not made that designation on the 30th day
before the Annuity Commencement Date, and both the Annuitant and the
Co-Annuitant are still living, the Co-Annuitant will become the Annuitant.
When an Annuity Option has been selected as the method of paying the death
benefit, the Beneficiary is the Annuitant.
SELECTION OF THE ANNUITY COMMENCEMENT DATE
You select the Annuity Commencement Date in your Application. The
following restrictions apply to the date you may select:
- The earliest possible Annuity Commencement date is the first day of the
second month following your Contract Date.
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- The latest possible Annuity Commencement Date is the first day of the
month following the Annuitant's 95th birthday or, if there is a
Co-Annuitant, the 95th birthday of the younger of the Annuitant and
Co-Annuitant.
- The Annuity Commencement Date must always be the first day of a month.
You may change the Annuity Commencement Date from time to time by sending
us written notice, with the following additional limitations:
- We must receive your notice at least 30 days before the current Annuity
Commencement Date.
- The new Annuity Commencement Date must be at least 30 days after we
receive the notice.
There may be other restrictions on your selection of the Annuity
Commencement Date imposed by your retirement plan or applicable law. In most
situations, current law requires that for a Qualified Contract, certain minimum
distributions must commence no later than April 1 following the year the
Annuitant reaches age 70 1/2 (or, for Qualified Contracts other than IRAs, no
later than April 1 following the year the Annuitant retires, if later than the
year the Annuitant reaches age 70 1/2).
ANNUITY OPTIONS
We offer the following Annuity Options for payments during the Income
Phase. Each Annuity Option may be selected for either a Variable Annuity, a
Fixed Annuity, or a combination of both. We may also agree to other settlement
options, in our discretion.
ANNUITY OPTION A -- LIFE ANNUITY
We provide monthly payments during the lifetime of the Annuitant. Annuity
payments stop when the Annuitant dies. There is no provision for continuation of
any payments to a Beneficiary.
ANNUITY OPTION B -- LIFE ANNUITY WITH 60, 120, 180 OR 240 MONTHLY PAYMENTS
CERTAIN
We make monthly payments during the lifetime of the Annuitant. In
addition, we guarantee that the Beneficiary will receive monthly payments for
the remainder of the period certain, if the Annuitant dies during that period.
The election of a longer period results in smaller monthly payments. If no
Beneficiary is designated, we pay the discounted value of the remaining payments
in one sum to the Annuitant's estate. The Beneficiary may also elect to receive
the discounted value of the remaining payments in one sum. The discount rate for
a Variable Annuity will be the assumed interest rate in effect; the discount
rate for a Fixed Annuity will be based on the interest rate we used to determine
the amount of each payment.
ANNUITY OPTION C -- JOINT AND SURVIVOR ANNUITY
We make monthly payments during the lifetime of the Annuitant and another
person you designate and during the lifetime of the survivor of the two. We stop
making payments when the last survivor dies. There is no provision for
continuance of any payments to a Beneficiary.
ANNUITY OPTION D -- MONTHLY PAYMENTS FOR A SPECIFIED PERIOD CERTAIN
We make monthly payments for a specified period of time from 5 to 30
years, as you elect. If payments under this option are paid on a variable
annuity basis, the Annuitant may elect to receive in one sum the discounted
value of the remaining payments, less any applicable withdrawal charge. The
discount rate for this purpose will be the assumed interest rate in effect. If
the Annuitant dies during the period selected, the remaining income payments are
made as described under Annuity Option B. The election of this Annuity Option
may result in the imposition of a penalty tax.
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SELECTION OF ANNUITY OPTION
You select one or more of the Annuity Options, which you may change from
time to time during the Accumulation Phase, as long as we receive your selection
or change in writing at least 30 days before the Annuity Commencement Date. If
we have not received your written selection on the 30th day before the Annuity
Commencement Date, you will receive Annuity Option B, for a life annuity with
120 monthly payments certain.
You may specify the proportion of your Adjusted Account Value you wish to
provide a Variable Annuity or a Fixed Annuity. Under a Variable Annuity, the
dollar amount of payments will vary, while under a Fixed Annuity, the dollar
amount of payments will remain the same. If you do not specify a Variable
Annuity or a Fixed Annuity, your Adjusted Account Value will be divided between
Variable and Fixed Annuities in the same proportions as your Account Value was
divided between the Variable and Fixed Accounts on the Annuity Commencement
Date. You may allocate your Adjusted Account Value applied to a Variable Annuity
among the Sub-Accounts, or we will use your existing allocations.
There may be additional limitations on the options you may elect under
your particular retirement plan or applicable law.
REMEMBER THAT THE ANNUITY OPTIONS MAY NOT BE CHANGED ONCE ANNUITY PAYMENTS
BEGIN.
AMOUNT OF ANNUITY PAYMENTS
ADJUSTED ACCOUNT VALUE
The Adjusted Account Value is the amount we apply to provide a Variable
Annuity and/or a Fixed Annuity. We calculate Adjusted Account Value by taking
your Account Value on the Business Day just before the Annuity Commencement Date
and making the following adjustments:
- We deduct a proportional amount of the Account Fee, based on the
fraction of the current Account Year that has elapsed;
- If applicable, we apply the Market Value Adjustment to your Account
Value in the Fixed Account, which may result in a deduction, an
addition, or no change; and
- We deduct any applicable premium tax or similar tax if not previously
deducted.
VARIABLE ANNUITY PAYMENTS
Variable Annuity payments may vary each month. We determine the dollar
amount of the first payment using the portion of your Adjusted Account Value
applied to a Variable Annuity and the Annuity Payment Rates in your Contract,
which are based on an assumed interest rate of 3% per year, compounded annually.
See "Annuity Payment Rates."
To calculate the remaining payments, we convert the amount of the first
payment into Annuity Units for each Sub-Account; we determine the number of
those Annuity Units by dividing the portion of the first payment attributable to
the Sub-Account by the Annuity Unit Value of that Sub-Account for the Valuation
Period ending just before the Annuity Commencement Date. This number of Annuity
Units for each Sub-Account will remain constant (unless the Annuitant requests
an exchange of Annuity Units). However, the dollar amount of the next Variable
Annuity payment -- which is the sum of the number of Annuity Units for each
Sub-Account times its Annuity Unit Value for the Valuation Period ending just
before the date of the payment -- will increase, decrease, or remain the same,
depending on the net investment return of the Sub-Accounts.
If the net investment return of the Sub-Accounts selected is the same as
the assumed interest rate of 3%, compounded annually, the payments will remain
level. If the net investment return exceeds the assumed interest rate, payments
will increase and, conversely, if it is less than the assumed interest rate,
payments will decrease.
Please refer to the Statement of Additional Information for more
information about calculating Variable Annuity Units and Variable Annuity
payments, including examples of these calculations.
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FIXED ANNUITY PAYMENTS
Fixed Annuity payments are the same each month. We determine the dollar
amount of each Fixed Annuity payment using the fixed portion of your Adjusted
Account Value and the applicable Annuity Payment Rates. These will be either (1)
the rates in your Contract, which are based on a minimum guaranteed interest
rate of 3% per year, compounded annually, or (2) new rates we have published and
are using on the Annuity Commencement Date, if they are more favorable. See
"Annuity Payment Rates."
MINIMUM PAYMENTS
If your Adjusted Account Value is less than $2,000, or the first annuity
payment for any Annuity Option is less than $20, we will pay the Adjusted
Account Value to the Annuitant in one payment.
EXCHANGE OF VARIABLE ANNUITY UNITS
During the Income Phase, the Annuitant may exchange Annuity Units from one
Sub-Account to another, up to 12 times each Account Year. To make an exchange,
the Annuitant sends us, at our Annuity Service Mailing Address, a written
request stating the number of Annuity Units in the Sub-Account he or she wishes
to exchange and the new Sub-Account for which Annuity Units are requested. The
number of new Annuity Units will be calculated so the dollar amount of an
annuity payment on the date of the exchange would not be affected. To calculate
this number, we use Annuity Unit values for the Valuation Period during which we
receive the exchange request.
We permit only exchanges among Sub-Accounts. No exchanges to or from a
Fixed Annuity are permitted.
ACCOUNT FEE
During the Income Phase, we deduct the annual Account Fee of $35 in equal
amounts from each Variable Annuity Payment. We do not deduct the Account Fee
from Fixed Annuity payments.
ANNUITY PAYMENT RATES
The Contract contains Annuity Payment Rates for each Annuity Option
described in this Prospectus. The rates show, for each $1,000 applied, the
dollar amount of: (a) the first monthly Variable Annuity payment based on the
assumed interest rate specified in the applicable Contract (at least 3% per
year, compounded annually); and (b) the monthly Fixed Annuity payment, when this
payment is based on the minimum guaranteed interest rate specified in the
Contract (at least 3% per year, compounded annually). We may change these rates
under Group Contracts for Accounts established after the effective date of such
change (See "Other Contract Provisions -- Modification").
The Annuity Payment Rates may vary according to the Annuity Option elected
and the adjusted age of the Annuitant. The Contract also describes the method of
determining the adjusted age of the Annuitant. The mortality table used in
determining the Annuity Payment Rates for Options A, B and C is the 1983
Individual Annuitant Mortality Table.
ANNUITY OPTIONS AS METHOD OF PAYMENT FOR DEATH BENEFIT
You or your Beneficiary may also select one or more Annuity Options to be
used in the event of your death before the Income Phase, as described under the
"Death Benefit" section of this Prospectus. In that case, your Beneficiary will
be the Annuitant. The Annuity Commencement Date will be the first day of the
second month beginning after the Death Benefit Date.
OTHER CONTRACT PROVISIONS
EXERCISE OF CONTRACT RIGHTS
An Individual Contract belongs to the individual to whom the Contract is
issued. A Group Contract belongs to the Owner. In the case of a Group Contract,
the Owner may expressly reserve all
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Contract rights and privileges; otherwise, each Participant will be entitled to
exercise such rights and privileges. In any case, such rights and privileges can
be exercised without the consent of the Beneficiary (other than an irrevocably
designated Beneficiary) or any other person. Such rights and privileges may be
exercised only during the lifetime of the Participant before the Annuity
Commencement Date, except as the Contract otherwise provides.
The Annuitant becomes the Payee on and after the Annuity Commencement
Date. The Beneficiary becomes the Payee on the death of the Participant prior to
the Annuity Commencement Date, or on the death of the Annuitant after the
Annuity Commencement Date. Such Payee may thereafter exercise such rights and
privileges, if any, of ownership which continue.
CHANGE OF OWNERSHIP
Ownership of a Qualified Contract may not be transferred except to: (1)
the Annuitant; (2) a trustee or successor trustee of a pension or profit sharing
trust which is qualified under Section 401 of the Internal Revenue Code; (3) the
employer of the Annuitant, provided that the Qualified Contract after transfer
is maintained under the terms of a retirement plan qualified under Section
403(a) of the Internal Revenue Code for the benefit of the Annuitant; (4) the
trustee or custodian of an individual retirement account plan qualified under
Section 408 of the Internal Revenue Code for the benefit of the Participants
under a Group Contract; or (5) as otherwise permitted from time to time by laws
and regulations governing the retirement or deferred compensation plans for
which a Qualified Contract may be issued. Subject to the foregoing, a Qualified
Contract may not be sold, assigned, transferred, discounted or pledged as
collateral for a loan or as security for the performance of an obligation or for
any other purpose to any person other than the Company.
The Owner of a Non-Qualified Contract may change the ownership of the
Contract prior to the last Annuity Commencement Date; and each Participant, in
like manner, may change the ownership interest in a Contract. A change of
ownership will not be binding on us until we receive written notification. When
we receive such notification, the change will be effective as of the date on
which the request for change was signed by the Owner or Participant, as
appropriate, but the change will be without prejudice to us on account of any
payment we make or any action we take before receiving the change. If you change
the Owner of a Non-Qualified Contract, you will become immediately liable for
the payment of taxes on any gain realized under the Contract prior to the change
of ownership, including possible liability for a 10% federal excise tax.
VOTING OF FUND SHARES
We will vote Fund shares held by the Sub-Accounts at meetings of
shareholders of the Funds or in connection with similar solicitations, but will
follow voting instructions received from persons having the right to give voting
instructions. During the Accumulation Phase, you will have the right to give
voting instructions, except in the case of a Group Contract where the Owner has
reserved this right. During the Income Phase, the Payee -- that is the Annuitant
or Beneficiary entitled to receive benefits -- is the person having such voting
rights. We will vote any shares attributable to us and Fund shares for which no
timely voting instructions are received in the same proportion as the shares for
which we receive instructions from Owners, Participants and Payees, as
applicable.
Owners of Qualified Contracts issued on a group basis may be subject to
other voting provisions of the particular plan and of the Investment Company Act
of 1940. Employees who contribute to plans that are funded by the Contracts may
be entitled to instruct the Owners as to how to instruct us to vote the Fund
shares attributable to their contributions. Such plans may also provide the
additional extent, if any, to which the Owners shall follow voting instructions
of persons with rights under the plans. If no voting instructions are received
from any such person with respect to a particular Participant Account, the Owner
may instruct the Company as to how to vote the number of Fund shares for which
instructions may be given.
Neither the Variable Account nor the Company is under any duty to provide
information concerning the voting instruction rights of persons who may have
such rights under plans, other than rights afforded by the Investment Company
Act of 1940, or any duty to inquire as to the instructions received
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or the authority of Owners, Participants or others, as applicable, to instruct
the voting of Fund shares. Except as the Variable Account or the Company has
actual knowledge to the contrary, the instructions given by Owners under Group
Contracts and Payees will be valid as they affect the Variable Account, the
Company and any others having voting instruction rights with respect to the
Variable Account.
All Fund proxy material, together with an appropriate form to be used to
give voting instructions, will be provided to each person having the right to
give voting instructions at least 10 days prior to each meeting of the
shareholders of the Fund. We will determine the number of Fund shares as to
which each such person is entitled to give instructions as of the record date
set by the Fund for such meeting which is expected to be not more than 90 days
prior to each such meeting. Prior to the Annuity Commencement Date, the number
of Fund shares as to which voting instructions may be given to the Company is
determined by dividing the value of all of the Variable Accumulation Units of
the particular Sub-Account credited to the Participant Account by the net asset
value of one Fund share as of the same date. On or after the Annuity
Commencement Date, the number of Fund shares as to which such instructions may
be given by a Payee is determined by dividing the reserve held by the Company in
the Sub-Account with respect to the particular Payee by the net asset value of a
Fund share as of the same date. After the Annuity Commencement Date, the number
of Fund shares as to which a Payee is entitled to give voting instructions will
generally decrease due to the decrease in the reserve.
PERIODIC REPORTS
During the Accumulation Period we will send you, or such other person
having voting rights, at least once during each Account Year, a statement
showing the number, type and value of Accumulation Units credited to your
Account and the Fixed Accumulation Value of your Account, which statement shall
be accurate as of a date not more than 2 months previous to the date of mailing.
These periodic statements contain important information concerning your
transactions with respect to a Contract. It is your obligation to review each
such statement carefully and to report to us, at the address or telephone number
provided on the statement, any errors or discrepancies in the information
presented therein within 60 days of the date of such statement. Unless we
receive notice of any such error or discrepancy from you within such period, we
may not be responsible for correcting the error or discrepancy.
In addition, every person having voting rights will receive such reports
or prospectuses concerning the Variable Account and the Funds as may be required
by the Investment Company Act of 1940 and the Securities Act of 1933. We will
also send such statements reflecting transactions in your Account as may be
required by applicable laws, rules and regulations.
Upon request, we will provide you with information regarding fixed and
variable accumulation values.
SUBSTITUTION OF SECURITIES
Shares of any or all Funds may not always be available for investment
under the Contract. We may add or delete Funds or other investment companies as
variable investment options under the Contracts. We may also substitute for the
shares held in any Sub-Account shares of another registered open-end investment
company or unit investment trust, provided that the substitution has been
approved , if required, by the SEC. In the event of any substitution pursuant to
this provision, we may make appropriate endorsement to the Contract to reflect
the substitution.
CHANGE IN OPERATION OF VARIABLE ACCOUNT
At our election and subject to any necessary vote by persons having the
right to give instructions with respect to the voting of Fund shares held by the
Sub-Accounts, the Variable Account may be operated as a management company under
the Investment Company Act of 1940 or it may be deregistered under the
Investment Company Act of 1940 in the event registration is no longer required.
Deregistration of the Variable Account requires an order by the SEC. In the
event of any change in the operation of the Variable Account pursuant to this
provision, we may make appropriate endorsement to
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the Contract to reflect the change and take such other action as may be
necessary and appropriate to effect the change.
SPLITTING UNITS
We reserve the right to split or combine the value of Variable
Accumulation Units, Annuity Units or any of them. In effecting any such change
of unit values, strict equity will be preserved and no change will have a
material effect on the benefits or other provisions of the Contract.
MODIFICATION
Upon notice to the Participant, in the case of an Individual Contract, and
the Owner and Participant(s), in the case of a Group Contract (or the Payee(s)
during the Income Phase), we may modify the Contract if such modification: (i)
is necessary to make the Contract or the Variable Account comply with any law or
regulation issued by a governmental agency to which the Company or the Variable
Account is subject; (ii) is necessary to assure continued qualification of the
Contract under the Internal Revenue Code or other federal or state laws relating
to retirement annuities or annuity contracts; (iii) is necessary to reflect a
change in the operation of the Variable Account or the Sub-Account(s) (See
"Change in Operation of Variable Account"); (iv) provides additional Variable
Account and/or fixed accumulation options; or (v) as may otherwise be in the
best interests of Owners, Participants, or Payees, as applicable. In the event
of any such modification, we may make appropriate endorsement in the Contract to
reflect such modification.
In addition, upon notice to the Owner, we may modify a Group Contract to
change the withdrawal charges, Account Fees, mortality and expense risk charges,
administrative expense charges, the tables used in determining the amount of the
first monthly variable annuity and fixed annuity payments and the formula used
to calculate the Market Value Adjustment, provided that such modification
applies only to Participant Accounts established after the effective date of
such modification. In order to exercise our modification rights in these
particular instances, we must notify the Owner of such modification in writing.
The notice shall specify the effective date of such modification which must be
at least 60 days following the date we mail notice of modification. All of the
charges and the annuity tables which are provided in the Group Contract prior to
any such modification will remain in effect permanently, unless improved by the
Company, with respect to Participant Accounts established prior to the effective
date of such modification.
DISCONTINUANCE OF NEW PARTICIPANTS
We may limit or discontinue the acceptance of new Applications and the
issuance of new Certificates under a Group Contract by giving 30 days prior
written notice to the Owner. This will not affect rights or benefits with
respect to any Participant Accounts established under such Group Contract prior
to the effective date of such limitation or discontinuance.
RESERVATION OF RIGHTS
We reserve the right, to the extent permitted by law, to: (1) combine any
2 or more variable accounts; (2) add or delete Funds or other investment
companies and corresponding Sub-Accounts; (3) add or remove Guarantee Periods
available at any time for election by a Participant; and (4) restrict or
eliminate any of the voting rights of Participants (or Owners) or other persons
who have voting rights as to the Variable Account. Where required by law, we
will obtain approval of changes from Participants or any appropriate regulatory
authority. In the event of any change pursuant to this provision, we may make
appropriate endorsement to the Contract to reflect the change.
RIGHT TO RETURN
If you are not satisfied with your Contract, you may return it by mailing
or delivering it to us at the Annuity Service Mailing Address on the cover of
this Prospectus within 10 days after it was delivered to you. When we receive
the returned Contract, it will be cancelled and we will refund to you your
Account Value at the end of the Valuation Period during which we received it.
However, if
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applicable state law requires we will return the full amount of any Purchase
Payment(s) we received. State law may also require us to give you a longer "free
look" period or allow you to return the Contract to your sales representative.
If you are establishing an Individual Retirement Account ("IRA"), the
Internal Revenue Code requires that we give you a disclosure statement
containing certain information about the Contract and applicable legal
requirements. We must give you this statement on or before the date the IRA is
established. If we give you the disclosure statement before the seventh day
preceding the date the IRA is established, you will not have any right of
revocation under the Code. If we give you the disclosure statement at a later
date, then you may give us a notice of revocation at any time within 7 days
after your Contract Date. Upon such revocation, we will refund your Purchase
Payment(s). This right of revocation with respect to an IRA is in addition to
the return privilege set forth in the preceding paragraph. We allow a
Participant establishing an IRA a "ten day free-look," notwithstanding the
provisions of the Internal Revenue Code.
FEDERAL TAX STATUS
INTRODUCTION
This section describes general federal income tax consequences based upon
our understanding of current federal tax laws. Actual federal tax consequences
may vary depending on, among other things, the type of retirement plan with
which you use a Contract and whether (depending on the site of Contract
issuance) Puerto Rico tax law applies. Also, Congress has the power to enact
legislation affecting the tax treatment of annuity contracts, and such
legislation could apply retroactively to Contracts that you purchased before the
date of enactment. We do not make any guarantee regarding the federal, state, or
local tax status of any Contract or any transaction involving any Contract. You
should consult a qualified tax professional for advice before purchasing a
Contract or executing any other transaction (such as a rollover, distribution,
withdrawal or payment) involving a Contract.
DEDUCTIBILITY OF PURCHASE PAYMENTS
For federal income tax purposes, Purchase Payments made under
Non-Qualified Contracts are not deductible.
PRE-DISTRIBUTION TAXATION OF CONTRACTS
Generally, an increase in the value of a Contract will not give rise to
tax, prior to distribution.
However, corporate (or other non-natural person) Owners of, and
Participants under, a Non-Qualified Contract incur current tax, regardless of
distribution, on Contract value increases. Such current taxation does not apply,
though, to (i) immediate annuities, which the Internal Revenue Code (the "Code")
defines as a single premium contract with an annuity commencement date within
one year of the date of purchase, or (ii) any Contract that the non-natural
person holds as agent for a natural person (such as where a bank or other entity
holds a Contract as trustee under a trust agreement).
The Internal Revenue Service could assert that Owners or Participants
under both Qualified Contracts and Non-Qualified Contracts annually receive a
taxable deemed distribution equal to the cost of any life insurance benefit
under the Contract.
You should note that qualified retirement investments automatically
provide tax deferral regardless of whether the underlying contract is an
annuity.
DISTRIBUTIONS AND WITHDRAWALS FROM NON-QUALIFIED CONTRACTS
The Account Value will include an amount attributable to Purchase
Payments, the return of which is not taxable, and an amount attributable to
investment earnings, the return of which is taxable at ordinary income rates.
The relative portions of a distribution that derive from nontaxable Purchase
Payments and taxable investment earnings depend upon the timing of the
distribution.
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If you withdraw less than your entire Account Value under a Non-Qualified
Contract before the Annuity Commencement Date, you must treat the withdrawal
first as a return of investment earnings. You may treat only withdrawals in
excess of the amount of the Account Value attributable to investment earnings as
a return of Purchase Payments. Account Value amounts assigned or pledged as
collateral for a loan will be treated as if withdrawn from the Contract.
If a Payee receives annuity payments under a Non-Qualified Contract after
the Annuity Commencement Date, however, the Payee treats a portion of each
payment as a nontaxable return of Purchase Payments. In general, the nontaxable
portion of such a payment bears the same ratio to the total payment as the
Purchase Payments bear to the Payee's expected return under the Contract. The
remainder of the payment constitutes a taxable return of investment earnings.
Once the Payee has received nontaxable payments in an amount equal to total
Purchase Payments, all future distributions constitute fully taxable ordinary
income. If the Annuitant dies before the Payee recovers the full amount of
Purchase Payments, the Payee may deduct an amount equal to unrecovered Purchase
Payments.
Upon the transfer of a Non-Qualified Contract by gift (other than to the
Participant's spouse), the Participant must treat an amount equal to the Account
Value minus the total amount paid for the Contract as income.
A penalty tax of 10% may apply to taxable cash withdrawals and lump-sum
payments from Non-Qualified Contracts. This penalty will not apply in certain
circumstances, such as distributions pursuant to the death of the Participant or
distributions under an immediate annuity (as defined above), or after age
59 1/2.
DISTRIBUTIONS AND WITHDRAWALS FROM QUALIFIED CONTRACTS
Generally, distributions from a Qualified Contract will constitute fully
taxable ordinary income. Also, a 10% penalty tax will, except in certain
circumstances, apply to distributions prior to age 59 1/2.
Distributions from a Qualified Contract are not subject to current
taxation or a 10% penalty, however, if:
- the distribution is not a hardship distribution or part of a series of
payments for life or for a specified period of 10 years or more (an
"eligible rollover distribution"), and
- the Participant or Payee rolls over the distribution (with or without
actually receiving the distribution) into a qualified retirement plan
eligible to receive the rollover.
Only you or your spouse may elect to roll over a distribution to an
eligible retirement plan.
WITHHOLDING
In the case of an eligible rollover distribution (as defined above) from a
Qualified Contract (other than from a Contract issued for use with an individual
retirement account), we (or the plan administrator) must withhold and remit to
the U.S. Government 20% of the distribution, unless the Participant or Payee
elects to make a direct rollover of the distribution to another qualified
retirement plan that is eligible to receive the rollover; however, only you and
your spouse may elect a direct rollover. In the case of a distribution from (i)
a Non-Qualified Contract, (ii) a Qualified Contract issued for use with an
individual retirement account, or (iii) a Qualified Contract where the
distribution is not an eligible rollover distribution, we will withhold and
remit to the U.S. Government a part of the taxable portion of each distribution
unless, prior to the distribution, the Participant or Payee provides us his or
her taxpayer identification number and instructs us (in the manner prescribed)
not to withhold. The Participant or Payee may credit against his or her federal
income tax liability for the year of distribution any amounts that we (or the
plan administrator) withhold.
35
<PAGE>
PURCHASE OF IMMEDIATE ANNUITY CONTRACT AND DEFERRED ANNUITY CONTRACT
You should consider the following information only if you intend to
purchase an immediate annuity contract and a deferred annuity contract together.
We understand that the Treasury Department might reconsider the tax treatment of
annuity payments under an immediate annuity contract (as defined above)
purchased together with a deferred annuity contract. We believe that any adverse
change in the existing tax treatment of such immediate annuity contracts would
not apply to contracts issued before the Treasury Department announces the
change. However, there can be no assurance that the Treasury Department will not
apply any such change retroactively.
INVESTMENT DIVERSIFICATION AND CONTROL
The Treasury Department has issued regulations that prescribe investment
diversification requirements for mutual fund series underlying nonqualified
variable contracts. Contracts must comply with these regulations to qualify as
annuities for federal income tax purposes. Contracts that do not meet the
guidelines are subject to current taxation on annual increases in value. We
believe that each Fund complies with these regulations. The preamble to the
regulations states that the Internal Revenue Service may promulgate guidelines
under which an owner's excessive control over investments underlying the
contract will preclude the contract from qualifying as an annuity for federal
tax purposes. We cannot predict whether such guidelines, if in fact promulgated,
will be retroactive. We will take any action (including modification of the
Contract and/or the Variable Account) necessary to comply with any retroactive
guidelines.
TAX TREATMENT OF THE COMPANY AND THE VARIABLE ACCOUNT
As a life insurance company under the Code, we will record and report
operations of the Variable Account separately from other operations. The
Variable Account will not, however, constitute a regulated investment company or
any other type of taxable entity distinct from our other operations. We will not
incur tax on the income of the Variable Account (consisting primarily of
interest, dividends, and net capital gains) if we use this income to increase
reserves under Contracts participating in the Variable Account.
QUALIFIED RETIREMENT PLANS
You may use Qualified Contracts with several types of qualified retirement
plans. Because tax consequences will vary with the type of qualified retirement
plan and the plan's specific terms and conditions, we provide below only brief,
general descriptions of the consequences that follow from using Qualified
Contracts in connection with various types of qualified retirement plans. We
stress that the rights of any person to any benefits under these plans may be
subject to the terms and conditions of the plans themselves, regardless of the
terms of the Qualified Contracts that you are using. These terms and conditions
may include restrictions on, among other things, ownership, transferability,
assignability, contributions and distributions. Owners, Participants, Payees,
Beneficiaries and administrators of qualified retirement plans should consider,
with the guidance of a tax adviser, whether the death benefit payable under the
Contract affects the qualified status of their retirement plan.
PENSION AND PROFIT-SHARING PLANS
Sections 401(a), 401(k) and 403(a) of the Code permit business employers
and certain associations to establish various types of retirement plans for
employees. The Tax Equity and Fiscal Responsibility Act of 1982 eliminated most
differences between qualified retirement plans of corporations and those of
self-employed individuals. Self-employed persons may therefore use Qualified
Contracts as a funding vehicle for their retirement plans, as a general rule.
TAX-SHELTERED ANNUITIES
Section 403(b) of the Code permits public school employees and employees
of certain types of charitable, educational and scientific organizations
specified in Section 501(c)(3) of the Code to purchase annuity contracts and,
subject to certain limitations, exclude the amount of purchase payments
36
<PAGE>
from gross income for tax purposes. The Code imposes restrictions on cash
withdrawals from Section 403(b) annuities.
If the Contracts are to receive tax deferred treatment, cash withdrawals
of amounts attributable to salary reduction contributions (other than
withdrawals of accumulation account value as of December 31, 1988) may be made
only when the Participant attains age 59 1/2, separates from service with the
employer, dies or becomes disabled (within the meaning of Section 72(m)(7) of
the Code). These restrictions apply to (i) any post-1988 salary reduction
contributions, (ii) any growth or interest on post-1988 salary reduction
contributions, and (iii) any growth or interest on pre-1989 salary reduction
contributions that occurs on or after January 1, 1989. It is permissible,
however, to withdraw post-1988 salary reduction contributions in cases of
financial hardship. While the Internal Revenue Service has not issued specific
rules defining financial hardship, we expect that to qualify for a hardship
distribution, the Participant must have an immediate and heavy bona fide
financial need and lack other resources reasonably available to satisfy the
need. Hardship withdrawals (as well as certain other premature withdrawals) will
be subject to a 10% tax penalty, in addition to any withdrawal charge applicable
under the Contracts. Under certain circumstances the 10% tax penalty will not
apply if the withdrawal is for medical expenses.
Under the terms of a particular Section 403(b) plan, the Participant may
be entitled to transfer all or a portion of the Account Value to one or more
alternative funding options. Participants should consult the documents governing
their plan and the person who administers the plan for information as to such
investment alternatives.
INDIVIDUAL RETIREMENT ACCOUNTS
Sections 219 and 408 of the Code permit eligible individuals to contribute
to an individual retirement program, including Simplified Employee Pension
Plans, Employer/Association of Employees Established Individual Retirement
Account Trusts, and Simple Retirement Accounts. Such IRAs are subject to
limitations on contribution levels, the persons who may be eligible, and on the
time when distributions may commence. In addition, certain distributions from
some other types of retirement plans may be placed in an IRA on a tax-deferred
basis. If we sell Contracts for use with IRAs, the Internal Revenue Service or
other agency may impose supplementary information requirements. We will provide
purchasers of the Contracts for such purposes with any necessary information.
You will have the right to revoke the Contract under certain circumstances, as
described in the section of this Prospectus entitled "Right to Return."
ROTH IRAS
Section 408A of the Code permits an individual to contribute to an
individual retirement program called a Roth IRA. Unlike contributions to a
traditional IRA under Section 408 of the Code, contributions to a Roth IRA are
not tax-deductible. Provided certain conditions are satisfied, distributions are
generally tax-free. Like traditional IRAs, Roth IRAs are subject to limitations
on contribution amounts and the timing of distributions. If an individual
converts a traditional IRA into a Roth IRA the full amount of the IRA is
included in taxable income. The Internal Revenue Service and other agencies may
impose special information requirements with respect to Roth IRAs. If and when
we make Contracts available for use with Roth IRAs, we will provide any
necessary information.
ADMINISTRATION OF THE CONTRACTS
We perform certain administrative functions relating to the Contracts,
Participant Accounts, and the Variable Account. These functions include, but are
not limited to, maintaining the books and records of the Variable Account and
the Sub-Accounts; maintaining records of the name, address, taxpayer
identification number, Contract number, Participant Account number and type, the
status of each Participant Account and other pertinent information necessary to
the administration and operation of the Contracts; processing Applications,
Purchase Payments, transfers and full and partial withdrawals; issuing Contracts
and Certificates; administering annuity payments; furnishing accounting and
37
<PAGE>
valuation services; reconciling and depositing cash receipts; providing
confirmations; providing toll-free customer service lines; and furnishing
telephonic transfer services.
DISTRIBUTION OF THE CONTRACTS
We offer the Contracts on a continuous basis. The Contracts are sold by
licensed insurance agents in those states where the Contracts may be lawfully
sold. Such agents will be registered representatives of broker-dealers
registered under the Securities Exchange Act of 1934 who are members of the
National Association of Securities Dealers, Inc. and who have entered into
distribution agreements with the Company and the general distributor, Clarendon
Insurance Agency, Inc. ("Clarendon"), One Sun Life Executive Park, Wellesley
Hills, Massachusetts 02481. Clarendon, a wholly-owned subsidiary of the Company,
is registered with the SEC under the Securities Exchange Act of 1934 as a
broker-dealer and is a member of the National Association of Securities Dealers,
Inc.
Commissions and other distribution compensation will be paid by the
Company to the selling agents and will not be more than 7.46% of Purchase
Payments. In addition, after the first Account Year, broker-dealers who have
entered into distribution agreements with the Company may receive an annual
renewal commission of no more than 1.00% of the Participant's Account Value. In
addition to commissions, the Company may, from time to time, pay or allow
additional promotional incentives, in the form of cash or other compensation. We
reserve the right to offer these additional incentives only to certain
broker-dealers that sell or are expected to sell during specified time periods
certain minimum amounts of the Contracts or Certificates or other contracts
offered by the Company. Promotional incentives may change at any time.
Commissions will not be paid with respect to Accounts established for the
personal account of employees of the Company or any of its affiliates, or of
persons engaged in the distribution of the Contracts, or of immediate family
members of such employees or persons. In addition, commissions may be waived or
reduced in connection with certain transactions described in this Prospectus
under the heading "Waivers; Reduced Charges; Credits; Bonus Guaranteed Interest
Rates."
PERFORMANCE INFORMATION
From time to time the Variable Account may publish reports to
shareholders, sales literature and advertisements containing performance
information relating to the Sub-Accounts. This information may include "Average
Annual Total Return," "Cumulative Growth Rate" and "Compound Growth Rate." Some
Sub-Accounts may advertise "yield" and "effective yield."
Average Annual Total Return measures the net income of the Sub-Account and
any realized or unrealized gains or losses of the Fund in which it invests, over
the period stated. Average Annual Total Return figures are annualized and
represent the average annual percentage change in the value of an investment in
a Sub-Account over that period. Cumulative Growth Rate represents the cumulative
change in the value of an investment in the Sub-Account for the period stated,
and is arrived at by calculating the change in the Accumulation Unit Value of a
Sub-Account between the first and the last day of the period being measured. The
difference is expressed as a percentage of the Accumulation Unit Value at the
beginning of the base period. "Compound Growth Rate" is an annualized measure,
calculated by applying a formula that determines the level of return which, if
earned over the entire period, would produce the cumulative return.
Average Annual Total Return figures assume an initial purchase payment of
$1,000 and reflect all applicable withdrawal and Contract charges. The
Cumulative Growth Rate and Compound Growth Rate figures that we advertise do not
reflect withdrawal charges or the Account Fee, although they reflect all
recurring charges. Results calculated without withdrawal and/or certain Contract
charges will be higher. We may also use other types of rates of return that do
not reflect withdrawal and Contract charges.
The performance figures used by the Variable Account are based on the
actual historical performance of the Funds for the specified periods, and the
figures are not intended to indicate future performance. For periods before the
date the Contracts became available, we calculate the performance
38
<PAGE>
information for the Sub-Account on a hypothetical basis. To do this, we reflect
deductions of the current Contract fees and charges from the historical
performance of the corresponding series.
Yield is a measure of the net dividend and interest income earned over a
specific one month or 30-day period (7-day period for the Sun Capital Money
Market Fund Sub-Account), expressed as a percentage of the value of the
Sub-Account's Accumulation Units. Yield is an annualized figure, which means
that we assume that the Sub-Account generates the same level of net income over
a one-year period and compound that income on a semi-annual basis. We calculate
the effective yield for the Sun Capital Money Market Fund Sub-Account similarly,
but include the increase due to assumed compounding. The Sun Capital Money
Market Fund Sub-Account's effective yield will be slightly higher than its yield
as a result of its compounding effect.
The Variable Account may also from time to time compare its investment
performance to various unmanaged indices or other variable annuities and may
refer to certain rating and other organizations in its marketing materials. More
information on performance and our computations is set forth in the Statement of
Additional Information.
The Company may also advertise the ratings and other information assigned
to it by independent industry ratings organizations. Some of these organizations
are A.M. Best, Moody's Investor's Service, Standard and Poor's Insurance Rating
Services, and Duff and Phelps. Each year A.M. Best reviews the financial status
of thousands of insurers, culminating in the assignment of Best's rating. These
ratings reflect A.M. Best's current opinion of the relevant financial strength
and operating performance of an insurance company in comparison to the norms of
the life/health industry. Best's ratings range from A++ to F. Standard and
Poor's and Duff and Phelps' ratings measure the ability of an insurance company
to meet its obligations under insurance policies it issues. These two ratings do
not measure the insurance company's ability to meet non-policy obligations.
Ratings in general do not relate to the performance of the Sub-Accounts.
We may also advertise endorsements from organizations, individuals or
other parties that recommend the Company or the Contracts. We may occasionally
include in advertisements (1) comparisons of currently taxable and tax deferred
investment programs, based on selected tax brackets; or (2) discussions of
alternative investment vehicles and general economic conditions.
AVAILABLE INFORMATION
The Company and the Variable Account have filed with the SEC registration
statements under the Securities Act of 1933 relating to the Contracts. This
Prospectus does not contain all of the information contained in the registration
statements and their exhibits. For further information regarding the Variable
Account, the Company and the Contracts, please refer to the registration
statements and their exhibits.
In addition, the Company is subject to the informational requirements of
the Securities Exchange Act of 1934. We file reports and other information with
the SEC to meet these requirements. You can inspect and copy this information
and our registration statements at the SEC's public reference facilities at the
following locations: WASHINGTON, D.C. -- 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549; CHICAGO, ILLINOIS -- 500 West Madison Street, Chicago,
IL 60661; NEW YORK, NEW YORK -- 7 World Trade Center, 13th Floor, New York, NY
10048. The Washington, D.C. office will also provide copies by mail for a fee.
You may also find these materials on the SEC's website (http:// www.sec.gov).
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Company's Annual Report on Form 10-K for the year ended December 31,
1998 filed with the SEC is incorporated by reference in this Prospectus. Any
statement contained in a document we incorporate by reference is deemed modified
or superceded to the extent that a later filed document, including this
Prospectus, shall modify or supercede that statement. Any statement so modified
or superceded shall not be deemed, except as so modified or superceded, to
constitute part of this Prospectus.
39
<PAGE>
The Company will furnish, without charge, to each person to whom a copy of
this Prospectus is delivered, upon the written or oral request of such person, a
copy of the document referred to above which has been incorporated by reference
in this Prospectus, other than exhibits to such document (unless such exhibits
are specifically incorporated by reference in this Prospectus). Requests for
such document should be directed to the Secretary, Sun Life Assurance Company of
Canada (U.S.), One Sun Life Executive Park, Wellesley Hills, Massachusetts
02481, telephone (800) 225-3950.
ADDITIONAL INFORMATION ABOUT THE COMPANY
BUSINESS OF THE COMPANY
We are engaged in the sale of individual variable life insurance and
individual and group fixed and variable annuities. These contracts are sold in
both the tax qualified and non-tax qualified markets. These products are
distributed through individual insurance agents, insurance brokers and
registered broker-dealers.
The following table sets forth premiums and deposits by major product
categories for each of the last three years. See notes to financial statements
for industry segment information.
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Individual insurance products $ 155,907 $ 204,670 $ 207,845
Retirement products $ 2,194,895 $ 2,204,693 $ 1,834,327
------------ ------------ ------------
$ 2,350,802 $ 2,409,363 $ 2,042,172
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
We have obtained authorization to do business in 48 states, the District
of Columbia and Puerto Rico, and anticipate that we will be authorized to do
business in all states except New York. We have formed a wholly-owned
subsidiary, Sun Life Insurance and Annuity Company of New York, which issues
individual fixed and combination fixed/variable annuity contracts and group life
and long-term disability insurance in New York. Our other active subsidiaries
are Sun Capital Advisers, Inc., a registered investment adviser, Clarendon
Insurance Agency, Inc., a registered broker-dealer that acts as the general
distributor of the Contracts and other annuity and life insurance contracts that
we and our affiliates issue, Sun Life of Canada (U.S.) Distributors, Inc., a
registered broker-dealer and investment adviser, New London Trust, F.S.B., a
federally chartered savings bank, Sun Life Financial Services Limited, which
provides off-shore administrative services to us and our parent, Sun Life
Assurance Company of Canada ("Sun Life (Canada)"), and Sun Life Information
Services Ireland Limited, an offshore technology center.
We are a wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings,
Inc. ("Life Holdco"). Life Holdco is a wholly-owned subsidiary of Sun Life
Assurance Company of Canada -- U.S. Operations Holdings, Inc. ("U.S. Holdco").
U.S. Holdco is a wholly-owned subsidiary of Sun Life (Canada), 150 King Street
West, Toronto, Ontario, Canada. Sun Life (Canada) is a mutual life insurance
company incorporated pursuant to Act of Parliament of Canada in 1865 and
currently transacts business in all of the Canadian provinces and territories,
all U.S. states (except New York), the District of Columbia, Puerto Rico, the
Virgin Islands, Great Britain, Ireland, Hong Kong, Bermuda and the Philippines.
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<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data for the Company should be read in
conjunction with the statutory financial statements of the Company and notes
thereto included in this Prospectus beginning on page 54.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
---------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenues
Premiums, annuity deposits and other revenue $ 2,581,463 $ 2,623,629 $ 2,215,322 $ 1,883,901 $ 1,997,525
Net investment income and realized gains 187,208 298,121 310,172 315,966 312,583
----------- ----------- ----------- ----------- -----------
2,768,671 2,921,750 2,525,494 2,199,867 2,310,108
----------- ----------- ----------- ----------- -----------
Benefits and expenses
Policyholder benefits 2,416,950 2,579,104 2,232,528 1,995,208 2,102,290
Other expenses 214,607 206,065 175,342 150,937 186,892
----------- ----------- ----------- ----------- -----------
2,631,557 2,785,169 2,407,870 2,146,145 2,289,182
----------- ----------- ----------- ----------- -----------
Operating gain 137,114 136,581 117,624 53,722 20,926
Federal income tax expense (benefit) 11,713 7,339 (5,400) 17,807 19,469
----------- ----------- ----------- ----------- -----------
Net income $ 125,401 $ 129,242 $ 123,024 $ 35,915 $ 1,457
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Assets $16,902,621 $15,925,357 $13,621,952 $12,359,683 $10,117,822
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Surplus notes $ 565,000 $ 565,000 $ 315,000 $ 650,000 $ 335,000
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
</TABLE>
See Note 1 to financial statements for changes in accounting principles and
reporting.
See discussion in Management's Discussion and Analysis of Financial Conditions
and Results of Operations.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
CAUTIONARY STATEMENT
This Prospectus includes forward looking statements by the Company under
the Private Securities Litigation Reform Act of 1995. These statements are not
matters of historical fact; they relate to such topics as future product sales,
Year 2000 compliance, volume growth, market share, market risk and financial
goals. It is important to understand that these forward-looking statements are
subject to certain risks and uncertainties that could cause actual results to
differ materially from those that the statements anticipate. These risks and
uncertainties may concern, among other things:
- The Company's ability to identify and address Year 2000 issues
successfully, in a timely manner, and at reasonable cost. They also may
concern the ability of the Company's vendors, suppliers, other service
providers, and customers to successfully address their own Year 2000
issues in a timely manner.
- Heightened competition, particularly in terms of price, product
features, and distribution capability, which could constrain the
Company's growth and profitability.
- Changes in interest rates and market conditions.
- Regulatory and legislative developments.
- Developments in consumer preferences and behavior patterns.
41
<PAGE>
RESULTS OF OPERATIONS
NET INCOME
Net income decreased by $3.8 million to $125.4 million in 1998, reflecting
an increase of $22.5 million in income from operations and a decrease of $26.3
million in net realized capital gains. (In the following discussion, "income
from operations" refers to the statutory statement of operations line item, net
gain from operations after dividends to policyholders and federal income tax and
before realized capital gains.)
Income from operations increased from $102.5 million in 1997 to $125.0
million in 1998, mainly as a result of the following factors:
- A $16.7 million increase, to $31.4 million in 1998, in the income from
operations from the Company's Retirement Products and Services segment.
(This is discussed in the "Retirement Products and Services Segment"
section below.)
- The effect of terminating certain reinsurance agreements with the
Company's ultimate parent. The termination of these agreements was the
predominant factor in the $71.1 million increase in income from
operations for the Company's Individual Insurance segment.
- The effects of the Company's December 1997 reorganization (described in
the "Corporate Segment" section below), as a result of which
Massachusetts Financial Services Company ("MFS") was no longer a
subsidiary of the Company. As a result of this reorganization,
dividends from subsidiaries were lower in 1998 than in 1997 and certain
subsidiary tax benefits were no longer available to the Company. Also
affecting income from operations for the Corporate segment in 1998 was
that income earned on the proceeds of a December 1997 issuance of a
$250 million surplus note was lower than the related interest expense.
Net realized capital gains decreased from $26.7 million in 1997 to $0.4
million in 1998. This change also reflected the Company's reorganization, as a
result of which the Company had a realized capital gain of $21.2 million in
1997.
Net income increased by $6.2 million to $129.2 million in 1997, as
compared to 1996 reflecting a decrease of $15.6 million in income from
operations and an increase of $21.8 million in net realized capital gains.
Income from operations decreased from $118.2 million in 1996 to $102.5
million in 1997, mainly as a result of the following factors:
- A $7.6 million decrease, to $14.7 million, in income from operations
from the Company's Retirement Products and Services segment. (This is
discussed in the "Retirement Products and Services Segment" section
below.)
- An increase of $6.5 million, compared to 1996, in the effects of the
reinsurance arrangements between the Company and its ultimate parent.
- A decrease, by approximately $9 million, in dividends from
subsidiaries, as well as higher taxes and expenses in the Corporate
segment.
As noted above, the $21.9 million increase in net realized capital gains,
from $4.8 million in 1996 to $26.7 million in 1997, was caused mainly by the
December 1997 Company reorganization, as a result of which the Company had a
realized capital gain of $21.2 million in 1997.
INCOME FROM OPERATIONS BY SEGMENT
The Company's income from operations reflects the operations of its three
business segments: the Retirement Products and Services segment, the Individual
Insurance segment and the Corporate segment. The following table provides a
summary:
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<PAGE>
Income from Operations by Segment*
($ in millions)
<TABLE>
<CAPTION>
% CHANGE
----------------------------
1998 1997 1996 1998/1997 1997/1996
--------- --------- --------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Individual Insurance 89.1 18.0 11.5 395.0% 56.5%
Retirement Products and Services 31.4 14.7 22.3 113.6% (34.1)%
Corporate 4.5 69.8 84.4 (93.6)% (17.3)%
--------- --------- --------- ----- -----
125.0 102.5 118.2 22.0% (13.3)%
--------- --------- --------- ----- -----
--------- --------- --------- ----- -----
</TABLE>
*Before realized capital gains
These results are discussed more fully below.
RETIREMENT PRODUCTS AND SERVICES SEGMENT
The Retirement Products and Services segment focuses on the savings and
retirement needs of those preparing for retirement or those who have already
retired. It primarily markets to upscale consumers in the U.S., selling
individual and group fixed and variable annuities. Its major product lines,
"Regatta" and "Futurity," are combination fixed/variable annuities. In these
combination annuities, contract holders have the choice of allocating payments
either to a fixed account, which provides a guaranteed rate of return, or to
variable accounts. Withdrawals from the Company's fixed account are subject to
market value adjustment. In the variable accounts, the contract holder can
choose from a range of investment options and styles. The return depends upon
investment performance of the options selected. Investment funds available under
Regatta are managed by MFS, an affiliate of the Company. Investment funds
available under Futurity products are managed by several investment managers,
including MFS and Sun Capital Advisers, Inc., a subsidiary of the Company.
The Company distributes these annuity products through a variety of
channels. For the Regatta products, about half are sold through securities
brokers, a further one-fourth through financial institutions, and the remainder
through insurance agents and financial planners. The Futurity products,
introduced in February 1998, are distributed through a dedicated wholesaler
network, including Sun Life of Canada (US) Distributors, Inc., that services
similar distribution channels.
Although new pension products are not currently sold, there has been a
substantial block of group retirement business in-force, including guaranteed
investment contracts ("GICs"), pension plans and group annuities. A significant
portion of these pension contracts are non-surrenderable, with the result that
the Company's liquidity exposure is limited. GICs were marketed directly in the
U.S. through independent managers. In 1997, the Company decided to no longer
market group pension and GIC products.
Following are the major factors affecting the Retirement Products and
Services segment results compared to the prior year:
1998 COMPARED TO 1997:
- A SHIFTING PATTERN IN SALES. Annuity deposits declined by about $27
million, or 1%, to $2.2 billion in 1998. Fixed annuity account deposits
were lower by approximately 7% in 1998, while deposits into variable
annuity accounts have been increasing in total and as a proportion of
total annuity deposits. These trends reflected market conditions and
competitive factors.
Deposits into the Dollar Cost Averaging (DCA) programs, a feature of
the Company's combination fixed/variable annuity products, were a
significant element of account deposits. Under these programs, which
were redesigned in late 1996, deposits are made into the fixed portion
of the annuity contract and receive a bonus rate of interest for the
policy year. During the year, the fixed deposit is systematically
transferred to the variable portion of the contract in equal periodic
installments. DCA deposits overall were flat in 1998 compared to
43
<PAGE>
1997. This pattern resulted, in part, from heightened competition, as
other companies introduced similar DCA programs within the past year.
During the fourth quarter of 1998, the Company introduced a higher DCA
rate and a new six-month DCA program. DCA deposits for that quarter
were higher, compared to the preceding 1998 quarters.
An increase in variable account deposits in 1998 reflected both the
continuing strong growth in equity markets generally and the continuing
strong performance of the investment funds underlying the Company's
variable annuity products. The continuing strong equity markets, low
interest rate environment, and demographic trends, among other factors,
have increased the demand and market for wealth accumulation products
in the U.S., particularly for variable annuities. These factors have
contributed to the growth in the Company's variable account deposits in
1998, despite heightened competition.
The Company introduced its Futurity line of products in February 1998.
Related deposits represented about 6% of the total for the Retirement
Products and Services segment in 1998, reflecting this recent
introduction. The Company expects that sales for the Futurity product
will continue to increase in the future, based on its beliefs that
market demand is growing for multi-manager variable annuity products,
such as Futurity; that the productivity of Futurity's wholesale
distribution network, established in 1998, will continue to grow; and
that the marketplace will respond favorably to future introductions of
new Futurity products and product enhancements.
- HIGHER FEE INCOME RESULTING FROM HIGHER VARIABLE ANNUITY ACCOUNT
BALANCES. The main factors driving this growth in account balances have
been market appreciation and net deposit activity. This growth has
generated corresponding increases in fee income, since fees are
determined based on the average assets held in these accounts. Fee
income increased by approximately $43 million, or 39%, in 1998.
- WHILE THERE HAS BEEN A SHIFT TO VARIABLE ACCOUNTS FROM THE GENERAL
ACCOUNT, NET INVESTMENT INCOME HAS DECLINED. Net investment income
reflects only income earned on invested assets of the general account.
In 1998, net investment income for the Retirement Products and Services
segment decreased by about $40 million, or 20%, compared to 1997,
mainly as a result of the decline in average invested assets in the
Company's general account. This decline in average general account
assets mainly reflected the shift in deposits in recent years from the
fixed account to variable accounts. It also reflected the Company's
decision in 1997 to no longer market group pension and GIC products.
- LOWER POLICYHOLDER BENEFITS, MAINLY REFLECTING LOWER SURRENDER ACTIVITY
COMPARED TO 1997. During 1997 and into the first half of 1998,
surrender and withdrawal activity was high. This activity primarily
related to a block of separate account contracts that had been issued
seven or more years previously and for which the surrender charge
periods had expired. While variable account surrenders have continued
to rise, general account surrenders have declined. As a result of this
pattern of activity, policyholder benefits (of which surrenders and
withdrawals, the related changes in the liability for premium and other
deposit funds, and related separate account transfers are the major
elements) increased in 1997 and were lower in 1998. The Company expects
that as the separate account block of business continues to grow, and
as a higher proportion of it is no longer subject to surrender charges,
surrenders will tend to increase.
- INVESTMENTS IN TECHNOLOGY AND INFRASTRUCTURE TO ENHANCE ANNUITY
OPERATIONS. As a result of these investments, operational expenses
increased by approximately $12 million, or 25%, in 1998 compared to
1997. These increases reflected three main factors:
(1) HIGHER VOLUMES OF ANNUITY BUSINESS, REQUIRING GREATER
ADMINISTRATIVE SUPPORT. The Company expects that increases in the
volume of its annuity business will continue to have a similar
effect on expenses in the near term.
(2) IMPROVEMENTS TO THE COMPUTER SYSTEMS AND TECHNOLOGY THAT
SUPPORT THE ANNUITY BUSINESS. These improvements involved
information systems supporting the growth of
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the Company's in-force business, particularly its combination
fixed/variable annuities. The Company expects to continue to
invest in its systems and technology in the future. The extent
and nature of these investments will depend on the Company's
assessments of the relative costs and benefits of given
projects.
(3) COSTS ASSOCIATED WITH THE PRODUCT DESIGN AND IMPLEMENTATION OF
THE NEW FUTURITY MULTI-MANAGER ANNUITY PRODUCT AND THE DEVELOPMENT
OF A NEW PRODUCT WITHIN THE REGATTA PRODUCT LINE. The Company
expects to continue to invest in further product enhancements
in the future.
1997 COMPARED TO 1996:
- STRONG FIXED ACCOUNT DEPOSITS. Fixed account deposits in 1997 were
approximately $650 million, or 240%, higher than in 1996. This increase
resulted mainly from the Company's redesign of its DCA programs in late
1996. The Company benefited at the time from the popularity of its DCA
program features and from the absence of major competitors offering
similar features.
- IN 1997, VARIABLE ANNUITY DEPOSITS WERE ABOUT $200 MILLION, OR 16%,
LOWER THAN IN 1996. This trend reflected heightened competition,
uncertainties in the marketplace regarding the attractiveness of
variable annuities, and customer preferences for depositing into the
DCA programs rather than directly into the variable accounts.
- HIGHER FEE INCOME RESULTING FROM HIGHER VARIABLE ANNUITY ACCOUNT
BALANCES. The main factors driving this growth in account balances were
market appreciation and net deposit activity. This growth generated
corresponding increases in fee income, since fees are determined based
on the average assets held in these accounts.
- DECLINING GENERAL ACCOUNT BALANCES, RESULTING IN DECLINING NET
INVESTMENT INCOME. In 1997, net investment income for the Retirement
Products and Services segment decreased by about 16%, mainly as a
result of a decline in average invested assets in the Company's general
account. This decline in average general account assets mainly
reflected the Company's decision in 1997 to no longer market group
pension and GIC products.
- HIGHER POLICYHOLDER BENEFITS, MAINLY REFLECTING HIGH SURRENDER ACTIVITY
IN 1997. As noted above, surrender and withdrawal activity was high in
1997. This activity primarily related to a block of separate account
contracts that had been issued seven or more years previously and for
which the surrender charge period had expired. As a result of this
pattern of activity, policyholder benefits (of which surrenders and
withdrawals, the related changes in the liability for premium and other
deposit funds, and related separate account transfers are the major
elements) were unusually high in 1997 compared to 1996.
- HIGHER COMMISSIONS. Commissions increased by approximately $22 million,
or 20%, in 1997, directly reflecting higher sales of combination
fixed/variable annuity products in 1997 compared to 1996.
- HIGHER OPERATIONAL EXPENSES. Operational expenses increased by
approximately $5 million, or 13%, as a result of the additional
staffing needed to administer higher volumes of business and because of
non-recurring costs of moving the Retirement Products and Services
operations to a new facility.
INDIVIDUAL INSURANCE SEGMENT
The Individual Insurance segment comprises two main elements: internal
reinsurance and variable life products.
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INTERNAL REINSURANCE
In recent years, the Company has had various reinsurance agreements with
its ultimate parent, Sun Life (Canada). In some of these arrangements, Sun Life
(Canada) has reinsured the mortality risks of individual life policies sold in
prior years by the Company. In another agreement, which became effective January
1, 1991 and terminated October 1, 1998, the Company reinsured certain individual
life insurance contracts issued by Sun Life (Canada). The latter agreement had a
significant effect on net income in both 1997 and 1998. The former agreements,
in the aggregate, also affected net income in those years, but to a much lesser
extent. The effects of these agreements on the Company's net income are
summarized in the following table.
INTERNAL REINSURANCE-EFFECT ON INCOME FROM OPERATIONS BEFORE INCOME TAXES
($ IN MILLIONS)
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
1991 Agreement
Effect on operations $ 24.6 $ 37.1 $ 35.2
Effect of termination 65.7 -- --
Other Agreements
Effect on operations (2.1) (1.4) (1.6)
--------- --------- ---------
Total $ 88.2 $ 35.7 $ 33.6
--------- --------- ---------
--------- --------- ---------
</TABLE>
Because the 1991 agreement was in effect only through the first nine
months of 1998, related net income was correspondingly lower in 1998 than in
1997. Also contributing to the lower 1998 net income from operations from this
agreement were proportionately higher death claims in 1998. The effect of
terminating this agreement was to further increase 1998 net income by $65.7
million. Neither the net income effect of this agreement's operations nor that
of its termination will recur. The termination-related increase in 1998
represents a reasonable approximation of the value of the stream of future
earnings that the agreement would have generated had it not been terminated.
VARIABLE LIFE PRODUCTS
This business includes the sale of individual variable life insurance
products, primarily the Company's variable universal life product for the
company-owned life insurance ("COLI") market. This product was introduced in
late 1997. The Company expects the variable life business to grow and become
more significant in the future.
CORPORATE SEGMENT
This segment includes the capital of the Company, its investments in
subsidiaries and items not otherwise attributable to either the Retirement
Products and Services and Individual Insurance segments. In 1998, income from
operations decreased by $65.3 million to $4.5 million for this segment. This
decrease reflected two main factors:
- DIVIDENDS FROM SUBSIDIARIES WERE LOWER THAN IN 1997 BY $37.5 MILLION.
This decrease mainly resulted from a December 1997 reorganization, in
which the Company transferred its ownership of MFS to its parent
company. As a result of this reorganization, the Company received no
dividends from MFS in 1998. By comparison, it received $33.1 million of
MFS dividends in 1997.
- Net investment income other than dividends from subsidiaries, was lower
than in 1997 by $5.9, reflecting the effect of the Company's December
1997 issuance of a $250 million surplus note to its upstream holding
company. Interest expense exceeded investment earnings on the related
funds.
In 1997, income from operations for this segment decreased by $14.6
million, to $69.8 million. This decrease mainly reflected a decrease, by
approximately $9 million, in dividends from subsidiaries. It also reflected
higher taxes and expenses.
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FINANCIAL CONDITION AND LIQUIDITY
ASSETS
The Company's total assets comprise those held in its general account and
those held in its separate accounts. General account assets support general
account liabilities. Separate accounts and their assets are of two main types:
- Those assets held in a "fixed" separate account, which the Company
established for amounts that contract holders allocate to the fixed
portion of their combination fixed/variable deferred annuity contracts.
Fixed separate account assets are available to fund general account
liabilities and general account assets are available to fund the
liabilities of this fixed separate account. The Company manages the assets
of this fixed separate account according to general account investment
policy guidelines.
- Those assets held in a number of registered and non-registered "variable"
separate accounts as investment vehicles for the Company's variable life
and annuity contracts. Policyholders may choose from among various
investment options offered under these contracts according to their
individual needs and preferences. Policyholders assume the investment
risks associated with these choices. General account and fixed separate
account assets are not available to fund the liabilities of these variable
accounts.
The following table summarizes significant changes in asset balances
during 1998 and 1997. The changes are discussed below.
<TABLE>
<CAPTION>
ASSETS % CHANGE
1998 1997 1996 1998/1997 1997/1996
---------- ---------- ---------- ------------ ------------
($ IN MILLIONS)
<S> <C> <C> <C> <C> <C>
General account assets $ 2,932.2 $ 4,513.5 $ 4,593.9 (35.0)% (1.75)%
Fixed separate account assets 2,195.6 2,343.9 2,108.8 (6.3)% 11.15%
---------- ---------- ---------- ------ ------
$ 5,127.8 $ 6,857.4 $ 6,702.7 (25.2)% 2.31%
Variable separate account assets 11,774.8 9,068.0 6,919.2 29.9% 31.06%
---------- ---------- ---------- ------ ------
Total assets $ 16,902.6 $ 15,925.4 $ 13,621.9 6.1% 16.91%
---------- ---------- ---------- ------ ------
---------- ---------- ---------- ------ ------
</TABLE>
General account and fixed separate account assets, taken together,
decreased by 25% in 1998, but variable separate account assets increased by 30%
that year. In 1997, growth in the general account and fixed separate account was
low; variable separate account assets increased by 31%. This growth in variable
accounts relative to the general and fixed accounts reflects two main factors:
appreciation of the funds held in the variable separate accounts has exceeded
that of the funds held in the general and fixed separate accounts; and annuity
deposits into variable accounts have increased, while annuity deposits into
fixed accounts have slowed. The Company believes this pattern reflects a shift
in the preferences of policyholders, which is largely attributable to the strong
performance of equity markets in general and of the Company's variable account
funds in particular.
The assets of the Company's general account are available to support
general account liabilities. For management purposes, it is the Company's
practice to segment its general account to facilitate the matching of assets and
liabilities. General account assets primarily comprise cash and invested assets,
which represented 98.7% of general account assets at year-end 1998. Major types
of invested asset holdings included bonds, mortgages, real estate and common
stock. The Company's bond holdings comprised 60.9% of the Company's portfolio at
year-end 1998. Bonds included both public and private issues. It is the
Company's policy to acquire only investment-grade securities. As a result, the
overall quality of the bond portfolio is high. At year-end 1998, only 5.3% of
these securities were rated below-investment-grade; I.E., they had National
Association of Insurance Commissioners ("NAIC") ratings lower than "1" or "2."
The Company's mortgage holdings amounted to $535.0 million at year-end 1998,
representing 18.5% of the total portfolio. All mortgage holdings at year-end
1998 were in good standing. The Company believes that the high quality of its
mortgage portfolio is largely attributable to its stringent underwriting
standards. At year-end 1998, investment real estate amounted to $78.0 million,
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<PAGE>
representing about 2.7% of the total portfolio. The Company invests in real
estate to enhance yields and, because of the long-term nature of these
investments, the Company uses them for purposes of matching with products having
long-term liability durations. Common stock holdings amounted to $128.4 million,
representing about 4.4% of the portfolio. These holdings comprised the Company's
ownership shares in subsidiaries.
Other general account assets decreased by $1,021.4 million in 1998. This
change primarily reflected the effect of terminating the internal reinsurance
agreement with the Company's ultimate parent, discussed in "Internal
Reinsurance," above.
LIABILITIES
As with assets, the proportion of variable separate account liabilities to
total liabilities has been increasing. Most of the Company's liabilities
comprise reserves for life insurance and for annuity contracts and deposit
funds. The Company expects the declining trend in general account liabilities to
continue, because it believes that net maturities will continue to exceed sales
for the fixed contracts associated with these liabilities. This trend stems
mainly from the Company's 1997 decision to discontinue selling group pension and
GIC contracts and to focus its marketing efforts on its combination
fixed/variable annuity products.
In December 1997, the Company borrowed $110.0 million from Sun Life
Assurance Company of Canada -- U.S. Operations Holdings, Inc. ("U.S. Holdco"),
its upstream holding company. The Company repaid this note during the first
quarter of 1998.
The termination of the internal reinsurance agreement discussed above
resulted in a $1.0 billion decrease in liabilities as compared to 1997.
CAPITAL MARKETS RISK MANAGEMENT
See "Quantitative and Qualitative Disclosures About Market Risk" below for
a discussion of the Company's capital markets risk management.
CAPITAL RESOURCES
CAPITAL ADEQUACY
The National Association of Insurance Commissioners ("NAIC") adopted
regulations at the end of 1993 that established minimum capitalization
requirements for insurance companies, based on risk-based capital ("RBC")
formulas. These requirements are intended to identify undercapitalized
companies, so that specific regulatory actions can be taken on a timely basis.
The RBC formula for life insurance companies sets capital requirements related
to asset, insurance, interest rate, and business risks. According to the RBC
calculation, the Company's capital was well in excess of its required capital at
year-end 1998.
LIQUIDITY
The Company's liquidity requirements are generally met by funds from
operations. The Company's main uses of funds are to pay out death benefits and
other maturing insurance and annuity contract obligations; to make pay-outs on
contract terminations; to purchase new investments; to fund new business
ventures; and to pay normal operating expenditures and taxes. The Company's main
sources of funds are premiums and deposits on insurance and annuity products;
proceeds from the sale of investments; income from investments; and repayments
of investment principal.
In managing its general account and fixed separate account assets in
relation to its liabilities, the Company has segmented these assets by product
or by groups of products. The Company manages each segment's assets based on an
investment policy that it has established for that segment. Among other matters,
this investment policy considers liquidity requirements and provides cash flow
estimates. The Company reviews these policies quarterly.
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<PAGE>
The Company's liquidity targets are intended to enable it to meet its
day-to-day cash requirements. On a quarterly basis, the Company compares its
total "liquifiable" assets to its total demand liabilities. Liquifiable assets
comprise cash and assets that could quickly be converted to cash should the need
arise. These assets include short-term investments and other current assets and
investment-grade bonds. The Company's policy is to maintain a liquidity ratio in
excess of 100%, and it did so throughout 1998. Based on its ongoing liquidity
analyses, the Company believes that its available liquidity is more than
sufficient to meet its liquidity needs.
DEMUTUALIZATION
On January 27, 1998, Sun Life (Canada) announced that its Board of
Directors had requested management world-wide to develop a plan to convert from
a mutual life insurance company into a publicly traded stock company through
demutualization worldwide. Management has put in place a full time task force
which, together with a worldwide team of actuarial, financial and legal
advisers, has begun work. The Board will decide later this year whether to
proceed with demutualization, following the completion of the plan.
Demutualization would require regulatory and policyholder approval. Based on
information known to date, the potential demutualization of Sun Life (Canada) is
not expected to have any significant impact on the Company.
YEAR 2000 COMPLIANCE
During the fourth quarter of 1996, the Company, Sun Life (Canada) and
affiliates began a comprehensive analysis of its information technology ("IT")
and non-IT systems, including its hardware, software, data, data feed products,
and internal and external supporting services, to address the ability of these
systems to correctly process date calculations through the year 2000 and beyond.
The Company created a full-time Year 2000 project team in early 1997 to manage
this endeavor across the Company. This team, which works with dedicated
personnel from all business units and with the legal and audit departments,
reports directly to the Company's senior management on a monthly basis. In
addition, the Company's Year 2000 project is periodically reviewed by internal
and external auditors.
To date, relevant systems have been identified and their components
inventoried, needed resolutions have been documented, timelines and project
plans have been developed, and remediation and testing are in process. Over 90%
of the components have been remediated, tested and are certified as Year 2000
compliant. The majority of the remaining components are in the testing phase and
are expected to be certified over the course of this year.
In mid-1997, the project team contacted all key vendors to obtain either
their certification for the products and services provided or their plan to make
those products and services compliant. Approximately 95% of these vendors have
responded and the project team has reviewed the responses and validated and
conducted tests with the vendors where appropriate. In addition, the project
team continues to work with critical business partners, such as third-party
administrators, investment property managers, investment mortgage
correspondents, and others, with the goal that these partners will continue to
be able to support the Company's objective of assuring Year 2000 compliance.
Non-IT applications, including building security, HVAC systems, and other
such systems, will be tested. Compliant client server and mainframe environments
have been built which allow for testing of critical dates such as December
31,1999, January 1, 2000, February 28, 2000, February 29, 2000 and March 1, 2000
without impact to current production.
Although the Company expects all critical systems to be Year 2000
compliant before the end of 1999, there can be no assurance that this result
will be achieved. Factors giving rise to this uncertainty include possible loss
of technical resources to perform the work, failure to identify all susceptible
systems, non-compliance by third-parties whose systems and operations affect the
Company, and other similar uncertainties. A possible worst-case scenario might
include one or more of the Company's significant systems being non-compliant.
Such a scenario could result in material disruption to the Company's operations.
Consequences of such disruptions could include, among other possibilities, the
inability to update customers' accounts, process payments and other financial
transactions; and report accurate data to customers, management, regulators, and
others. Consequences also could include
49
<PAGE>
business interruptions or shutdowns, reputational harm, increased scrutiny by
regulators, and litigation related to Year 2000 issues. Such potential
consequences, depending on their nature and duration, could have a material
impact on the Company's results of operations and financial position.
In order to mitigate the risks to the Company of material adverse
operational or financial impacts from failure to achieve planned Year 2000
compliance, the Company has established contingency planning at the business
unit and corporate levels. Each business unit has ranked its applications as
being of high, medium or low business risk to ensure that the most critical are
addressed first. The business units also have developed alternate plans of
action where possible, and established dates for the alternate plans to be
enacted. On the corporate level, the Company is in the process of enhancing its
business continuation plan by identifying minimum requirements for facilities,
computing, staffing, and other factors, and it is developing a plan to support
those requirements.
As of year-end 1998, the Company had expended, cumulatively, approximately
$4.2 million on its Year 2000 effort, and it expects to incur a further $1.3
million on this effort in 1999.
SALE OF SUBSIDIARY
In February 1999, the Company completed the sale of its wholly-owned
subsidiary, Massachusetts Casualty Insurance Company ("MCIC"), to Centre
Solutions (U.S.) Limited, a wholly-owned subsidiary of Centre Reinsurance
Holdings, Limited, for approximately $34 million. MCIC sold individual
disability insurance throughout the U.S. This transaction is not expected to
have a significant effect on the operations of the Company.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
This discussion covers market risks associated with investment portfolios
that support the Company's general account liabilities. This discussion does not
cover market risks associated with those investment portfolios that support
separate account products. For these products, the policyholder, rather than the
Company, assumes these market risks.
GENERAL
The assets of the Company's general account are available to support
general account liabilities. For purposes of managing these assets in relation
to these liabilities, the Company notionally segments these assets by product or
by groups of products. The Company manages each segment's assets based on an
investment policy that it has established for that segment. The policy covers
the segment's liability characteristics and liquidity requirements, provides
cash flow estimates, and sets targets for asset mix, duration, and quality. Each
quarter, investment and business unit managers review these policies to ensure
that the policies remain appropriate, taking into account each segment's
liability characteristics.
TYPES OF MARKET RISKS
The Company's stringent underwriting standards and practices have resulted
in high-quality portfolios and have the effect of limiting credit risk. It is
the Company's policy, for example, not to purchase below-investment-grade
securities. Also, as a matter of investment policy, the Company assumes no
foreign currency or commodity risk; nor does it assume equity price risk except
to the extent that it holds real estate in its portfolios. (At year-end 1998,
investment real estate holdings represented approximately 3% of its total
general account portfolio.) The management of interest rate risk exposure is
discussed below.
INTEREST RATE RISK MANAGEMENT
The Company's fixed interest rate liabilities are primarily supported by
well diversified portfolios of fixed interest investments. They are also
supported by holdings of real estate and floating rate notes. All of these fixed
interest investments are held for other than trading purposes and can include
publicly issued and privately placed bonds and commercial mortgage loans. Public
bonds can include Treasury
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<PAGE>
bonds, corporate bonds, and money market instruments. The Company's fixed income
portfolios also hold securitized assets, including mortgage-backed securities
(MBS) and asset-backed securities. These securities are subject to the same
standards applied to other portfolio investments, including relative value
criteria and diversification guidelines. In portfolios backing
interest-sensitive liabilities, the Company's policy is to limit MBS holdings to
less than 10% of total portfolio assets. In all portfolios, the Company
restricts MBS investments to pass-through securities issued by U.S. Government
agencies and to collateralized mortgage obligations, which are expected to
exhibit relatively low volatility. The Company does not engage in leveraged
transactions and it does not invest in the more speculative forms of these
instruments such as the interest-only, principal-only, inverse floater, or
residual tranches.
Changes in the level of domestic interest rates affect the market value of
fixed interest assets and liabilities. Segments whose liabilities mainly arise
from the sale of products containing interest rate guarantees for certain terms
are sensitive to changes in interest rates. In these segments, the Company uses
"immunization" strategies, which are specifically designed to minimize the loss
from wide fluctuations in interest rates. The Company supports these strategies
using analytical and modeling software acquired from outside vendors.
Significant features of the Company's immunization models include:
- an economic or market value basis for both assets and liabilities;
- an option pricing methodology;
- the use of effective duration and convexity to measure interest rate
sensitivity; and
- the use of "key rate durations" to estimate interest rate exposure at
different parts of the yield curve and to estimate the exposure to
non-parallel shifts in the yield curve.
The Company's Interest Rate Risk Committee meets monthly. After reviewing
duration analyses, market conditions and forecasts, the Committee develops
specific asset management strategies for the interest-sensitive portfolios.
These strategies may involve managing to achieve small intentional mismatches,
either in terms of total effective duration or for certain key rate durations,
between the liabilities and related assets of particular segments. The Company
manages these mismatches to a tolerance range of plus or minus 0.5.
Asset strategies may include the use of Treasury futures or interest rate
swaps to adjust the duration profiles for particular portfolios. All derivative
transactions are conducted under written operating guidelines and are marked to
market. Total positions and exposures are reported to the Company's Board of
Directors on a monthly basis. The counterparties to hedging transactions are
major highly rated financial institutions, with respect to which the risk of the
Company's incurring losses related to credit exposures is considered remote.
Liabilities categorized as financial instruments and held in the Company's
general account at December 31, 1998 had a fair value of $1,538.3 million. Fixed
income investments supporting those liabilities had a fair value of $2,710.1
million at that date. The Company performed a sensitivity analysis on these
interest-sensitive liabilities and assets at December 31, 1998. The analysis
showed that if there were an immediate increase of 100 basis points in interest
rates, the fair value of the liabilities would show a net decrease of $46.3
million and the corresponding assets would show a net decrease of $113.2
million.
By comparison, liabilities categorized as financial instruments and held
in the Company's general account at December 31, 1997 had a fair value of
$1,986.4 million. Fixed income investments supporting those liabilities had a
fair value of $3,276.2 million at that date. The Company performed a sensitivity
analysis on these interest-sensitive liabilities and assets at December 31,
1997. The analysis showed that if there were an immediate increase of 100 basis
points in interest rates, the fair value of the liabilities would show a net
decrease of $56.0 million and the corresponding assets would show a net decrease
of $108.0 million.
The Company produced these estimates using computer models. Since these
models reflect assumptions about the future, they contain an element of
uncertainty. For example, the models contain
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<PAGE>
assumptions about future policyholder behavior and asset cash flows. Actual
policyholder behavior and asset cash flows could differ from what the models
show. As a result, the models' estimates of duration and market values may not
reflect what actually will occur. The models are further limited by the fact
that they do not provide for the possibility that management action could be
taken to mitigate adverse results. The Company believes that this limitation is
one of conservatism, that is, it will tend to cause the models to produce
estimates that are generally worse than one might actually expect, all other
things being equal.
Based on its processes for analyzing and managing interest rate risk, the
Company believes its exposure to interest rate changes will not materially
affect its near-term financial position, results of operations, or cash flows.
REINSURANCE
The Company has agreements with Sun Life (Canada) which provide that Sun
Life (Canada) will reinsure the mortality risks of the individual life insurance
contracts previously sold by the Company. Under these agreements, basic death
benefits and supplementary benefits are reinsured on a yearly renewable term
basis and coinsurance basis, respectively. Reinsurance transactions under these
agreements in 1998 had the effect of decreasing net income from operations by
$2,128,000.
Effective January 1, 1991 the Company entered into an agreement with Sun
Life (Canada) under which certain individual life insurance contracts issued by
Sun Life (Canada) were reinsured by the Company on a 90% coinsurance basis. Also
effective January 1, 1991, the Company entered into an agreement with Sun Life
(Canada) which provides that Sun Life (Canada) will reinsure the mortality risks
in excess of $500,000 per policy for the individual life insurance contracts
assumed by the Company in the reinsurance agreement described above. Death
benefits are reinsured on a yearly renewable term basis. The life reinsurance
assumed agreement requires the reinsurer to withhold funds in an amount equal to
the reserves assumed. These agreements had the effect of increasing income from
operations by approximately $24,579,000 for the year ended December 31, 1998.
The Company terminated these agreements, effective October 1, 1998, resulting in
an increase in income from operations of $65,679,000, which included a cash
settlement.
The Company has also executed reinsurance agreements with unaffiliated
companies. These agreements provide reinsurance of certain individual life
insurance contracts on a modified coinsurance basis under which all deficiency
reserves are ceded; as well as reinsurance for variable universal life on a
yearly renewable term basis for which the Company has a maximum retention of
$2,000,000.
RESERVES
In accordance with the life insurance laws and regulations under which the
Company operates, it is obligated to carry on its books, as liabilities,
actuarially determined reserves to meet its obligations on its outstanding
contracts. Reserves are based on mortality tables in general use in the United
States and are computed to equal amounts that, with additions from premiums to
be received, and with interest on such reserves compounded annually at certain
assumed rates, will be sufficient to meet the Company's policy obligations at
their maturities or in the event of an insured's death. In the accompanying
Financial Statements, these reserves are determined in accordance with statutory
regulations.
INVESTMENTS
Of the Company's total assets of $16.9 billion at December 31, 1998, 82.7%
($13.98 billion) consisted of unitized and non-unitized separate account assets,
10.4% ($1.76 billion) was invested in bonds and similar securities, 3.2% ($541
million) was invested in mortgages, 0.7 % ($118.3 million) was invested in
subsidiaries, 0.6% ($101.4 million) was invested in real estate, and the
remaining 2.4% ($405.6 million) was invested in cash and other assets.
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COMPETITION
The Company is engaged in a business that is highly competitive because of
the large number of stock and mutual life insurance companies and other entities
marketing insurance products. According to a 1998 statistical study, published
by A.M. Best, the Company ranked 37th among North American life insurance
companies based upon total assets as of December 31, 1997. Its ultimate parent
company, Sun Life (Canada), ranked 21st.
EMPLOYEES
The Company and Sun Life (Canada) have entered into a service agreement
which provides that the latter will furnish the Company, as required, with
personnel as well as certain services and facilities on a cost reimbursement
basis. Expenses under this agreement amounted to approximately $16,344,000 in
1998. As of March 31, 1999, the Company had 392 direct employees employed at its
Principal Executive Office in Wellesley Hills, Massachusetts and at its
Retirement Products and Services Division in Boston, Massachusetts.
PROPERTIES
The Company occupies office space owned by it and leased to Sun Life
(Canada), and certain unrelated parties for lease terms not exceeding five
years. The Company also occupies office space which it leases from unaffiliated
parties for various lease terms. Rent received by the Company under the leases
amounted to approximately $6,856,000 in 1998.
STATE REGULATION
The Company is subject to the laws of the State of Delaware governing life
insurance companies and to regulation by the Commissioner of Insurance of
Delaware. An annual statement is filed with the Commissioner of Insurance on or
before March lst in each year relating to the operations of the Company for the
preceding year and its financial condition on December 31st of such year. Its
books and records are subject to review or examination by the Commissioner or
his agents at any time and a full examination of its operations is conducted at
periodic intervals.
The Company is also subject to the insurance laws and regulations of the
other states and jurisdictions in which it is licensed to operate. The laws of
the various jurisdictions establish supervisory agencies with broad
administrative powers with respect to licensing to transact business, overseeing
trade practices, licensing agents, approving policy forms, establishing reserve
requirements, fixing maximum interest rates on life insurance policy loans and
minimum rates for accumulation of surrender values, prescribing the form and
content of required financial statements and regulating the type and amounts of
investments permitted. Each insurance company is required to file detailed
annual reports with supervisory agencies in each of the jurisdictions in which
it does business and its operations and accounts are subject to examination by
such agencies at regular intervals.
In addition, many states regulate affiliated groups of insurers, such as
the Company, its parent and its affiliates, under insurance holding company
legislation. Under such laws, inter-company transfers of assets and dividend
payments from insurance subsidiaries may be subject to prior notice or approval,
depending on the size of such transfers and payments in relation to the
financial positions of the companies involved.
Under insurance guaranty fund laws in most states, insurers doing business
therein can be assessed (up to prescribed limits) for policyholder losses
incurred by insolvent companies. The amount of any future assessments of the
Company under these laws cannot be reasonably estimated. However, most of these
laws do provide that an assessment may be excused or deferred if it would
threaten an insurer's own financial strength and many permit the deduction of
all or a portion of any such assessment from any future premium or similar taxes
payable.
Although the federal government generally does not directly regulate the
business of insurance, federal initiatives often have an impact on the business
in a variety of ways. Current and proposed
53
<PAGE>
federal measures which may significantly affect the insurance business include
employee benefit regulation, removal of barriers preventing banks from engaging
in the insurance business, tax law changes affecting the taxation of insurance
companies, the tax treatment of insurance products and its impact on the
relative desirability of various personal investment vehicles.
LEGAL PROCEEDINGS
There are no pending legal proceedings affecting the Variable Account. We
and our subsidiaries are engaged in various kinds of routine litigation which,
in management's judgment, is not of material importance to our respective total
assets or material with respect to the Variable Account.
ACCOUNTANTS
The financial statements of the Variable Account for the year ended
December 31, 1998 included in the Statement of Additional Information and the
statutory financial statements of the Company for the years ended December 31,
1998, 1997 and 1996 included in this Prospectus have been audited by Deloitte &
Touche LLP, independent auditors, as stated in their reports appearing herein,
and are included in reliance upon the report of such firm given upon their
authority as experts in accounting and auditing.
FINANCIAL STATEMENTS
The financial statements of the Company which are included in this
Prospectus should be considered only as bearing on the ability of the Company to
meet its obligations with respect to amounts allocated to the Fixed Account and
with respect to the death benefit and the Company's assumption of the mortality
and expense risks. They should not be considered as bearing on the investment
performance of the Fund shares held in the Sub-Accounts of the Variable Account.
The financial statements of the Variable Account for the year ended
December 31, 1998 are included in the Statement of Additional Information.
------------------------
54
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
STATUTORY STATEMENTS OF ADMITTED ASSETS, LIABILITIES AND
CAPITAL STOCK AND SURPLUS
DECEMBER 31, 1998 AND 1997 (IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
ADMITTED ASSETS
Bonds $ 1,763,468 $ 1,910,699
Common stocks 128,445 117,229
Mortgage loans on real estate 535,003 684,035
Properties acquired in satisfaction of debt 17,207 22,475
Investment real estate 78,021 78,426
Policy loans 41,944 40,348
Cash and short-term investments 265,226 544,418
Other invested assets 64,177 55,716
Life insurance premiums and annuity considerations due and uncollected -- 9,203
Investment income due and accrued 35,706 39,279
Federal income tax recoverable and interest thereon 1,110 --
Receivable from parent, subsidiaries and affiliates -- 27,136
Funds withheld on reinsurance assumed -- 982,653
Other assets 1,928 1,842
------------- -------------
General account assets 2,932,235 4,513,459
Separate account assets:
Unitized 11,774,745 9,068,021
Non-unitized 2,195,641 2,343,877
------------- -------------
Total Admitted Assets $ 16,902,621 $ 15,925,357
------------- -------------
------------- -------------
LIABILITIES
Aggregate reserve for life policies and contracts $ 1,216,107 $ 2,188,243
Supplementary contracts 1,885 2,247
Policy and contract claims 369 2,460
Provision for policyholders' dividends and coupons payable -- 32,500
Liability for premium and other deposit funds 1,000,875 1,450,705
Surrender values on cancelled policies 5 215
Interest maintenance reserve 40,490 33,830
Commissions to agents due or accrued 2,615 2,826
General expenses due or accrued 5,932 6,238
Transfers from Separate Accounts due or accrued (361,863) (284,078)
Taxes, licenses and fees due or accrued, excluding FIT 401 105
Federal income taxes due or accrued 25,019 56,384
Unearned investment income 23 34
Amounts withheld or retained by company as agent or trustee 529 47
Remittances and items not allocated 5,176 1,363
Borrowed money -- 110,142
Asset valuation reserve 44,392 47,605
Payable to parent, subsidiaries, and affiliates 30,381 --
Payable for securities 428 27,104
Other liabilities 9,770 2,924
------------- -------------
General account liabilities 2,022,534 3,680,894
Separate account liabilities:
Unitized 11,774,522 9,067,891
Non-unitized 2,195,641 2,343,877
------------- -------------
Total liabilities 15,992,697 15,092,662
------------- -------------
CAPITAL STOCK AND SURPLUS
Common capital stock 5,900 5,900
------------- -------------
Surplus notes 565,000 565,000
Gross paid in and contributed surplus 199,355 199,355
Unassigned funds 139,669 62,440
------------- -------------
Surplus 904,024 826,795
------------- -------------
Total common capital stock and surplus 909,924 832,695
------------- -------------
Total Liabilities, Capital Stock and Surplus $ 16,902,621 $ 15,925,357
------------- -------------
------------- -------------
</TABLE>
SEE NOTES TO STATUTORY FINANCIAL STATEMENTS.
55
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
STATUTORY STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (IN 000'S)
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
INCOME:
Premiums and annuity considerations $ 210,198 $ 254,066 $ 266,942
Deposit-type funds 2,140,604 2,155,297 1,775,230
Considerations for supplementary
contracts without life
contingencies and dividend
accumulations 2,086 1,615 2,340
Net investment income 184,532 270,249 303,753
Amortization of interest maintenance
reserve 2,282 1,166 1,557
Income from fees associated with
investment management and
administration and contract
guarantees from Separate Account 141,211 109,757 83,278
Net gain from operations from
Separate Account -- 5 --
Other income 87,364 102,889 87,532
---------- ---------- ----------
Total 2,768,277 2,895,044 2,520,632
---------- ---------- ----------
BENEFITS AND EXPENSES:
Death benefits 15,335 17,284 12,394
Annuity benefits 153,636 148,135 146,654
Disability benefits and benefits
under accident and health policies 104 132 105
Surrender benefits and other fund
withdrawals 1,933,833 1,854,004 1,507,263
Interest on policy or contract funds (140) 699 2,205
Payments on supplementary contracts
without life contingencies and
dividend accumulations 2,528 1,687 2,120
Increase (decrease) in aggregate
reserves for life and accident and
health policies and contracts (972,135) 127,278 162,678
Decrease in liability for premium
and other deposit funds (449,831) (447,603) (392,348)
Increase (decrease) in reserve for
supplementary contracts without
life contingencies and for
dividend and coupon accumulations (362) 42 327
---------- ---------- ----------
Total 682,968 1,701,658 1,441,398
Commissions on premiums and annuity
considerations (direct business
only) 137,718 132,700 109,894
Commissions and expense allowances
on reinsurance assumed 13,032 17,951 18,910
General insurance expenses 58,132 46,624 37,206
Insurance taxes, licenses and fees,
excluding federal income taxes 7,388 8,267 8,431
Increase (decrease) in loading on
and cost of collection in excess
of loading on deferred and
uncollected premiums (1,663) 523 901
Net transfers to Separate Accounts 722,851 844,130 761,941
Reserve and fund adjustments on
reinsurance terminated 1,017,112 -- --
---------- ---------- ----------
Total 2,637,538 2,751,853 2,378,681
---------- ---------- ----------
Net gain from operations before
dividends to policyholders and
Federal Income Taxes 130,739 143,191 141,951
Dividends to policyholders (5,981) 33,316 29,189
---------- ---------- ----------
Net gain from operations after
dividends to policyholders and
before Federal Income Taxes 136,720 109,875 112,762
Federal income tax expense
(benefit), (excluding tax on
capital gains) 11,713 7,339 (5,400)
---------- ---------- ----------
Net gain from operations after
dividends to policyholders and
federal income taxes and before
realized capital gains 125,007 102,536 118,162
Net realized capital gains less
capital gains tax and transferred
to the IMR 394 26,706 4,862
---------- ---------- ----------
NET INCOME $ 125,401 $ 129,242 $ 123,024
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
SEE NOTES TO STATUTORY FINANCIAL STATEMENTS.
56
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
STATUTORY STATEMENTS OF CHANGES IN CAPITAL STOCK AND SURPLUS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (IN 000'S)
<TABLE>
<CAPTION>
1998 1997 1996
---------- ----------- -----------
<S> <C> <C> <C>
Capital and surplus, Beginning of year $ 832,695 $ 567,143 $ 792,452
---------- ----------- -----------
Net income 125,401 129,242 123,024
Change in net unrealized capital gains (losses) (384) 1,152 (1,715)
Change in non-admitted assets and related items (1,086) (463) 67
Change in reserve on account of change in valuation basis -- 39,016 --
Change in asset valuation reserve 3,213 6,307 (11,812)
Surplus (contributed to) withdrawn from Separate Accounts
during period 82 -- 100
Other changes in surplus in Separate Accounts Statements 10 -- --
Change in surplus notes -- 250,000 (335,000)
Dividends to stockholders (50,000) (159,722) --
Aggregate write-ins for gains and losses in surplus (7) 20 27
---------- ----------- -----------
Net change in capital and surplus for the year 77,229 265,552 (225,309)
---------- ----------- -----------
Capital and surplus, End of year $ 909,924 $ 832,695 $ 567,143
---------- ----------- -----------
---------- ----------- -----------
</TABLE>
SEE NOTES TO STATUTORY FINANCIAL STATEMENTS.
57
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
STATUTORY STATEMENTS OF CASH FLOW
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Cash Provided by Operations:
Premiums, annuity considerations and
deposit funds received $ 2,361,669 $ 2,410,919 $ 2,059,577
Considerations for supplementary
contracts and dividend accumulations
received 2,086 1,615 2,340
Net investment income received 236,944 345,279 324,914
Other income received 253,147 208,223 88,295
----------- ----------- -----------
Total receipts 2,853,846 2,966,036 2,475,126
----------- ----------- -----------
Benefits paid (other than dividends) 2,107,736 2,020,747 1,671,483
Insurance expenses and taxes paid
(other than federal income and
capital gains taxes) 217,023 203,650 172,015
Net cash transferred to Separate
Accounts 800,636 895,465 755,605
Dividends paid to policyholders 26,519 28,316 22,689
Federal income tax payments
(recoveries),(excluding tax on
capital gains) 46,965 1,397 (15,363)
Other--net (138) 698 2,205
----------- ----------- -----------
Total payments 3,198,741 3,150,273 2,608,634
----------- ----------- -----------
Net cash used in operations (344,895) (184,237) (133,508)
----------- ----------- -----------
Proceeds from long-term investments
sold, matured or repaid (after
deducting taxes on capital gains of
$2,038 for 1998, $750 for 1997 and
$1,555 for 1996) 1,261,396 1,343,803 1,768,147
Issuance (repayment) of surplus notes -- 250,000 (335,000)
Other cash provided (used) (40,529) 71,095 147,956
----------- ----------- -----------
Total cash provided 1,220,867 1,664,898 1,581,103
----------- ----------- -----------
Cash Applied:
Cost of long-term investments acquired (967,901) (773,783) (1,318,880)
Other cash applied (187,263) (310,519) (177,982)
----------- ----------- -----------
Total cash applied (1,155,164) (1,084,302) (1,496,862)
Net change in cash and short-term
investments (279,192) 396,359 (49,267)
Cash and short-term investments:
Beginning of year 544,418 148,059 197,326
----------- ----------- -----------
End of year $ 265,226 $ 544,418 $ 148,059
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
SEE NOTES TO STATUTORY FINANCIAL STATEMENTS.
58
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL
Sun Life Assurance Company of Canada (U.S.) (the "Company") is
incorporated as a life insurance company and is currently engaged in the sale of
individual variable life insurance, individual fixed and variable annuities,
group fixed and variable annuities and group pension contracts.
Effective May 1, 1997, the Company became a wholly-owned subsidiary of the
newly established Sun Life of Canada (U.S.) Holdings, Inc. ("Life Holdco"). On
December 18, 1997, Life Holdco became a wholly-owned subsidiary of the Sun Life
Assurance Company of Canada - U.S. Operations Holdings, Inc. ("US Holdco"). US
Holdco is a wholly-owned subsidiary of Sun Life Assurance Company of Canada
("SLOC"). Prior to December 18, 1997, Life Holdco was a direct wholly-owned
subsidiary of SLOC.
The Company, which is domiciled in the State of Delaware, prepares its
financial statements in accordance with statutory accounting practices
prescribed or permitted by the State of Delaware Insurance Department.
Prescribed accounting practices include practices described in a variety of
publications of the National Association of Insurance Commissioners ("NAIC"), as
well as state laws, regulations and general administrative rules. Permitted
accounting practices encompass all accounting practices not so prescribed. The
permitted accounting practices adopted by the Company are not material to the
financial statements. Prior to 1996, statutory accounting practices were
recognized by the insurance industry and the accounting profession as generally
accepted accounting principles for mutual life insurance companies and stock
life insurance companies wholly-owned by mutual life insurance companies. In
April 1993, the Financial Accounting Standards Board ("FASB") issued an
interpretation (the "Interpretation"), that became effective in 1996, which
changed the previous practice of mutual life insurance companies (and stock life
insurance companies that are wholly-owned subsidiaries of mutual life insurance
companies) with respect to utilizing statutory basis financial statements for
general purposes, in that it will no longer allow such financial statements to
be described as having been prepared in conformity with generally accepted
accounting principles ("GAAP"). Consequently, these financial statements
prepared in conformity with statutory accounting practices, as described above,
vary from and are not intended to present the Company's financial position,
results of operations or cash flow in conformity with generally accepted
accounting principles. (See Note 20 for further discussion relative to the
Company's basis of financial statement presentation.) The effects on the
financial statements of the variances between the statutory basis of accounting
and GAAP, although not reasonably determinable, are presumed to be material.
INVESTED ASSETS
Bonds are carried at cost, adjusted for amortization of premium or accrual
of discount. Investments in non-insurance subsidiaries are carried on the equity
basis. Investments in mortgage backed securities are generally carried at
amortized cost. Changes in prepayment assumptions and resulting cash flows are
evaluated periodically. The adjusted yield is used to calculate investment
income in future periods. If current book value exceeds future undiscounted cash
flows, a realized capital loss is recorded and amortized through IMR.
Investments in insurance subsidiaries are carried at their statutory surplus
values. Mortgage loans acquired at a premium or discount are carried at
amortized values and other mortgage loans are carried at the amounts of the
unpaid balances. Real estate investments are carried at the lower of cost,
adjusted for accumulated depreciation or appraised value, less encumbrances.
Short-term investments are carried at amortized cost, which approximates fair
value. Depreciation of buildings and improvements is calculated using the
straight-line method over the estimated useful life of the property, generally
40 to 50 years.
59
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED):
POLICY AND CONTRACT RESERVES
The reserves for life insurance and annuity contracts, developed by
accepted actuarial methods, have been established and maintained on the basis of
published mortality tables using assumed interest rates and valuation methods
that will provide reserves at least as great as those required by law and
contract provisions.
INCOME AND EXPENSES
For life and annuity contracts, premiums are recognized as revenues over
the premium paying period, whereas commissions and other costs applicable to the
acquisition of new business are charged to operations as incurred.
SEPARATE ACCOUNTS
The Company has established unitized separate accounts applicable to
various classes of contracts providing for variable benefits. Contracts for
which funds are invested in separate accounts include variable life insurance
and individual and group qualified and non-qualified variable annuity contracts.
Assets and liabilities of the separate accounts, representing net deposits
and accumulated net investment earnings less fees, held primarily for the
benefit of contract holders, are shown as separate captions in the financial
statements. Assets held in the separate accounts are carried at market value as
determined by quoted market prices of the underlying investments.
The Company has also established a non-unitized separate account for
amounts allocated to the fixed portion of certain combination fixed/variable
deferred annuity contracts. The assets of this account are available to fund
general account liabilities, and general account assets are available to fund
liabilities of this account.
Gains (losses) from mortality experience and investment experience of the
separate accounts, not applicable to contract owners, are transferred to (from)
the general account. Accumulated gains (losses) that have not been transferred
are recorded as a payable (receivable) to (from) the general account. Amounts
payable to the general account of the Company were $361,863,000 in 1998 and
$284,078,000 in 1997.
CHANGES IN ACCOUNTING PRINCIPLES AND REPORTING
As described more fully in Note 10, during 1997 the Company changed
certain assumptions used in determining actuarial reserves.
In March 1998, the National Association of Insurance Commissioners adopted
the Codification of Statutory Accounting Principles ("Codification"). The
Codification, which is intended to standardize regulatory accounting and
reporting for the insurance industry, is proposed to be effective January 1,
2001. However, statutory accounting principles will continue to be established
by individual state laws and permitted practices and it is uncertain when, or
if, the state of Delaware will require adoption of Codification for the
preparation of statutory financial statements. The Company has not finalized the
quantification of the effects of Codification on its statutory financial
statements.
OTHER
Preparation of the financial statements requires management to make
estimates and assumptions that affect reported amounts of assets, liabilities,
revenues and expenses. Actual results could differ from those estimates.
Certain prior year amounts have been reclassified to conform to amounts as
presented in the current year.
60
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
2. INVESTMENTS IN SUBSIDIARIES
The Company owns all of the outstanding shares of Sun Life Insurance and
Annuity Company of New York ("Sun Life (N.Y.)"), Massachusetts Casualty
Insurance Company ("MCIC"), Sun Life of Canada (U.S.) Distributors, Inc.
(formerly Sun Investment Services Company) ("Sundisco"), New London Trust,
F.S.B. ("NLT"), Sun Life Financial Services Limited ("SLFSL"), Sun Benefit
Services Company, Inc. ("Sunbesco"), Sun Capital Advisers, Inc. ("Sun Capital"),
Sun Life Finance Corporation ("Sunfinco"), Sun Life of Canada (U.S.) SPE 97-1,
Inc. ("SPE 97-1"), Clarendon Insurance Agency, Inc. ("Clarendon") and Sun Life
Information Services Ireland Ltd. ("SLISL").
On February 5, 1999, the Company finalized the sale of MCIC, a disability
insurance company which issues primarily individual disability income policies,
to Centre Solutions (U.S.) Limited, a wholly-owned subsidiary of Centre
Reinsurance Holdings Limited for approximately $34 million. The impact of this
sale to the ongoing operations of the Company is not expected to be material.
On September 28, 1998, the Company formed SLISL as an offshore technology
center for the purpose of completing systems projects for affiliates.
On October 30, 1997, the Company established a wholly-owned special
purpose corporation, SPE 97-1, for the purpose of engaging in activities
incidental to securitizing mortgage loans.
On December 31, 1997, the Company purchased from Massachusetts Financial
Services ("MFS") all of the outstanding shares of Clarendon, a registered
broker-dealer that acts as the general distributor of certain annuity and life
insurance contracts issued by the Company and its affiliates.
Prior to December 24, 1997, the Company owned 93.6% of the outstanding
shares of MFS. On December 24, 1997, the Company transferred all of its shares
of MFS to Life Holdco in the form of a dividend valued at $159,722,000. As a
result of this transaction, the Company realized a gain of $21,195,000 of
undistributed earnings.
MFS, a registered investment adviser, serves as investment adviser to the
mutual funds in the MFS family of funds as well as certain mutual funds and
separate accounts established by the Company. The MFS Asset Management Group
provides investment advice to substantial private clients.
Sun Life (N.Y.) is engaged in the sale of individual fixed and variable
annuity contracts and group life and disability insurance contracts in the State
of New York.
Sundisco is a registered investment adviser and broker-dealer.
NLT is a federally chartered savings bank.
SLFSL serves as the marketing administrator for the distribution of the
offshore products of Sun Life Assurance Company of Canada (Bermuda), an
affiliate.
Sun Capital is a registered investment adviser.
Sunfinco and Sunbesco are currently inactive.
On September 28, 1998 a $500,000 note was issued by SLISL to the Company
at a rate of 6.0%, maturing on September 28, 2002.
A $110,000,000 note was issued to the Company by MFS on February 11, 1998
at an interest rate of 6.0% due February 11, 1999. Another $110,000,000 note was
issued to the Company by MFS on December 22, 1998 at an interest rate of 5.55%
due February 11, 1999.
61
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
2. INVESTMENTS IN SUBSIDIARIES (CONTINUED):
On December 23, 1997, the Company issued a $110,000,000 note to US Holdco
at an interest rate of 5.80%, which was repaid on March 1, 1998. A $110,000,000
note was also issued to the Company by MFS on December 23, 1997 at an interest
rate of 5.85% and was repaid on February 11, 1998.
On December 31, 1996, the Company issued a $58,000,000 note to SLOC at an
interest rate of 5.70% which was repaid on February 10, 1997. Also on December
31, 1996, the Company was issued a $58,000,000 note by MFS at an interest rate
of 5.76%. This note was repaid to the Company on February 10, 1997. On December
31, 1998, 1997 and 1996, the Company had an additional $20,000,000 in notes
issued by MFS, scheduled to mature in 2000.
During 1998, 1997, and 1996, the Company contributed capital in the
following amounts to its subsidiaries:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
MCIC -- $ 2,000 $ 10,000
SLFSL $ 750 1,000 1,500
SPE 97-1 -- 20,377 --
Sundisco 10,000 -- --
Sun Capital 500 -- --
Clarendon 10 -- --
SLISL 502 -- --
</TABLE>
Summarized combined financial information of the Company's subsidiaries as
of December 31, 1998, 1997 and 1996 and for the years then ended, follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
Intangible assets $ -- $ -- $ 9,646
Other assets 1,315,317 1,190,951 1,376,014
Liabilities (1,186,872) (1,073,966) (1,241,617)
------------- ------------- -------------
Total net assets $ 128,445 $ 116,985 $ 144,043
------------- ------------- -------------
------------- ------------- -------------
Total revenues $ 222,853 $ 750,364 $ 717,280
Operating expenses (221,933) (646,896) (624,199)
Income tax expense (1,222) (43,987) (42,820)
------------- ------------- -------------
Net income (loss) $ (302) $ 59,481 $ 50,261
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
On December 24, 1997, the Company transferred all of its shares of MFS to
its parent, Life Holdco.
62
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
3. BONDS
Investments in debt securities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1998
----------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS (LOSSES) VALUE
------------ ----------- ----------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Long-term bonds:
United States government and government agencies and
authorities $ 140,417 $ 7,635 $ (177) $ 147,875
States, provinces and political subdivisions 16,632 2,219 -- 18,851
Public utilities 397,670 38,740 (238) 436,172
Transportation 197,207 22,481 (18) 219,670
Finance 144,958 12,542 (494) 157,006
All other corporate bonds 866,584 50,814 (6,419) 910,979
------------ ----------- ----------- ------------
Total long-term bonds 1,763,468 134,431 (7,346) 1,890,553
------------ ----------- ----------- ------------
Short-term bonds:
U.S. Treasury Bills, bankers acceptances and commercial
paper 43,400 -- -- 43,400
Affiliates 220,000 -- -- 220,000
------------ ----------- ----------- ------------
Total short-term bonds 263,400 -- -- 263,400
------------ ----------- ----------- ------------
Total bonds $ 2,026,868 $ 134,431 $ (7,346) $ 2,153,953
------------ ----------- ----------- ------------
------------ ----------- ----------- ------------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
----------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS (LOSSES) VALUE
------------ ----------- ----------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Long-term bonds:
United States government and government agencies and
authorities $ 126,923 $ 5,529 $ -- $ 132,452
States, provinces and political subdivisions 22,361 2,095 -- 24,456
Public utilities 398,939 35,338 (91) 434,186
Transportation 214,130 22,000 (390) 235,740
Finance 157,891 5,885 (120) 163,656
All other corporate bonds 990,455 52,678 (5,456) 1,037,677
------------ ----------- ----------- ------------
Total long-term bonds 1,910,699 123,525 (6,057) 2,028,167
------------ ----------- ----------- ------------
Short-term bonds:
U.S. Treasury Bills, bankers acceptances and commercial
paper 431,032 -- -- 431,032
Affiliates 110,000 -- -- 110,000
------------ ----------- ----------- ------------
Total short-term bonds 541,032 -- -- 541,032
------------ ----------- ----------- ------------
Total bonds $ 2,451,731 $ 123,525 $ (6,057) $ 2,569,199
------------ ----------- ----------- ------------
------------ ----------- ----------- ------------
</TABLE>
63
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
3. BONDS (CONTINUED):
The amortized cost and estimated fair value of bonds at December 31, 1998
are shown below by contractual maturity. Expected maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call and/or prepayment penalties.
<TABLE>
<CAPTION>
DECEMBER 31, 1998
--------------------------
AMORTIZED ESTIMATED
COST FAIR VALUE
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
Maturities:
Due in one year or less $ 459,631 $ 460,787
Due after one year through five years 329,625 336,516
Due after five years through ten years 264,372 283,840
Due after ten years 703,341 781,253
------------ ------------
1,756,969 1,862,396
Mortgage-backed securities 269,899 291,557
------------ ------------
Total bonds $ 2,026,868 $ 2,153,953
------------ ------------
------------ ------------
</TABLE>
Proceeds from sales and maturities of investments in debt securities
during 1998, 1997, and 1996 were $1,016,811,000, $980,264,000, and
$1,554,016,000, gross gains were $17,025,000, $10,732,000, and $16,975,000 and
gross losses were $866,000, $2,446,000, and $10,885,000, respectively.
Bonds included above with an amortized cost of approximately $2,572,000,
$2,578,000 and $2,060,000 at December 31, 1998, 1997 and 1996, respectively,
were on deposit with governmental authorities as required by law.
Excluding investments in U.S. government and agencies securities, the
Company is not exposed to significant concentration of credit risk in its
portfolio.
4. SECURITIES LENDING
The Company has a securities lending program operated on its behalf by the
Company's primary custodian, Chase Manhattan Bank of New York. The custodian has
indemnified the Company against losses arising from this program. There were no
securities out on loan as of December 31, 1998 and 1997. Income resulting from
this program was $94,000, $200,000 and $137,000 for the years ended December 31,
1998, 1997 and 1996, respectively.
5. MORTGAGE LOANS
The Company invests in commercial first mortgage loans throughout the
United States. The Company monitors the condition of the mortgage loans in its
portfolio. In those cases where mortgages have been restructured, appropriate
allowances for losses have been made. In those cases where, in management's
judgment, the mortgage loans' values are impaired, appropriate losses are
recorded.
64
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
5. MORTGAGE LOANS (CONTINUED):
The following table shows the geographical distribution of the mortgage
loan portfolio.
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1998 1997
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
California $ 82,397 $ 119,122
Massachusetts 53,528 58,981
Michigan 34,357 42,912
New York 21,190 45,696
Ohio 36,171 51,862
Pennsylvania 93,587 97,949
Washington 36,548 54,948
All other 177,225 212,565
---------- ----------
$ 535,003 $ 684,035
---------- ----------
---------- ----------
</TABLE>
The Company has restructured mortgage loans totaling $30,743,000 and
$26,284,000 at December 31, 1998 and 1997, respectively, against which there are
allowances for losses of $2,120,000 and $3,026,000, respectively.
The Company has made commitments of mortgage loans on real estate into the
future. The outstanding commitments for these mortgages amount to $18,005,000
and $12,300,000 at December 31, 1998 and 1997, respectively.
6. INVESTMENT GAINS AND LOSSES
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------
1998 1997 1996
---------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Net realized gains (losses):
Bonds $ 5,659 $ 2,882 $ 5,631
Common stock of affiliates -- 21,195 --
Common stocks 48
Mortgage loans 2,374 3,837 763
Real estate 955 2,912 599
Other invested assets (3,827) (717) 567
---------- ---------- ---------
Subtotal 5,209 30,109 7,560
Capital gains tax expense 4,815 3,403 2,698
---------- ---------- ---------
Total $ 394 $ 26,706 $ 4,862
---------- ---------- ---------
---------- ---------- ---------
Changes in unrealized gains (losses):
Common stock of affiliates $ (302) $ (2,894) $ (5,739)
Mortgage loans (1,312) 1,524 (600)
Real estate 403 3,377 4,624
Other invested assets 827 (855) --
---------- ---------- ---------
Total $ (384) $ 1,152 $ (1,715)
---------- ---------- ---------
---------- ---------- ---------
</TABLE>
Realized capital gains and losses on bonds and mortgages and interest rate
swaps which relate to changes in levels of interest rates are charged or
credited to an interest maintenance reserve ("IMR") and amortized into income
over the remaining contractual life of the security sold. The net realized
capital
65
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
6. INVESTMENT GAINS AND LOSSES (CONTINUED):
gains credited to the interest maintenance reserve were $8,943,000 in 1998,
$6,321,000 in 1997, and $7,710,000 in 1996. All gains and losses are transferred
net of applicable income taxes.
7. NET INVESTMENT INCOME
Net investment income consisted of:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1998 1997 1996
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Interest income from bonds $ 167,436 $ 188,924 $ 178,695
Income from investment in common stock of affiliates 3,675 41,181 50,408
Interest income from mortgage loans 53,269 76,073 92,591
Real estate investment income 15,932 17,161 16,249
Interest income from policy loans 2,881 3,582 2,790
Other investment income (loss) (641) (193) 1,710
---------- ---------- ----------
Gross investment income 242,552 326,728 342,443
---------- ---------- ----------
Interest on surplus notes and notes payable (44,903) (42,481) (23,061)
Investment expenses (13,117) (13,998) (15,629)
---------- ---------- ----------
Net investment income $ 184,532 $ 270,249 $ 303,753
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
8. DERIVATIVES
The Company uses derivative instruments for interest rate risk management
purposes, including hedges against specific interest rate risk and to minimize
the Company's exposure to fluctuations in interest rates. The Company's use of
derivatives has included U.S. Treasury futures, conventional interest rate
swaps, and forward spread lock interest rate swaps.
In the case of interest rate futures, gains or losses on contracts that
qualify as hedges are deferred until the earliest of the completion of the
hedging transaction, determination that the transaction will no longer take
place, or determination that the hedge is no longer effective. Upon completion
of the hedge, where it is impractical to allocate gains or losses to specific
hedged assets or liabilities, gains or losses are deferred in IMR and amortized
over the remaining life of the hedged assets. At December 31, 1998 and 1997
there were no futures contracts outstanding.
In the case of interest rate and foreign currency swap agreements and
forward spread lock interest rate swap agreements, gains or losses on terminated
swaps are deferred in the IMR and amortized over the shorter of the remaining
life of the hedged asset sold or the remaining term of the swap contract. The
net differential to be paid or received on interest rate swaps is recorded
monthly as interest rates change.
66
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
8. DERIVATIVES (CONTINUED):
Options are used to hedge the stock market interest exposure in the
mortality and expense risk charges and guaranteed minimum death benefit features
of the Company's variable annuities. The Company's open positions are as
follows:
<TABLE>
<CAPTION>
SWAPS OUTSTANDING
AT DECEMBER 31, 1998
---------------------------------
NOTIONAL MARKET VALUE
PRINCIPAL AMOUNTS OF POSITIONS
------------------ -------------
(IN THOUSANDS)
<S> <C> <C>
Conventional interest rate swaps $ 45,000 $ 508
Foreign currency swap 1,178 263
</TABLE>
<TABLE>
<CAPTION>
SWAPS OUTSTANDING
AT DECEMBER 31, 1997
---------------------------------
NOTIONAL MARKET VALUE
PRINCIPAL AMOUNTS OF POSITIONS
------------------ -------------
(IN THOUSANDS)
<S> <C> <C>
Conventional interest rate swaps $ 80,000 $ (2,891)
Foreign currency swap 1,700 208
Forward spread lock swaps 50,000 274
Asian Put Option S & P 500 75,000 693
</TABLE>
The market value of swaps is the estimated amount that the Company would
receive or pay on termination or sale, taking into account current interest
rates and the current credit worthiness of the counterparties. The Company is
exposed to potential credit loss in the event of nonperformance by
counterparties. The counterparties are major financial institutions and
management believes that the risk of incurring losses related to credit risk is
remote.
9. LEVERAGED LEASES
The Company is a lessor in a leveraged lease agreement entered into on
October 21, 1994, under which equipment having an estimated economic life of
25-40 years was leased for a term of 9.75 years. The Company's equity investment
represented 22.9% of the purchase price of the equipment. The balance of the
purchase price was furnished by third-party long-term debt financing,
collateralized by the equipment and non-recourse to the Company. At the end of
the lease term, the Master Lessee may exercise a fixed price purchase option to
purchase the equipment.
67
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
9. LEVERAGED LEASES (CONTINUED):
The Company's net investment in leveraged leases is composed of the
following elements:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1998 1997
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Lease contracts receivable $ 78,937 $ 92,605
Less non-recourse debt (78,920) (92,589)
---------- ----------
17 16
Estimated residual value of leased assets 41,150 41,150
Less unearned and deferred income (8,932) (10,324)
---------- ----------
Investment in leveraged leases 32,235 30,842
Less fees (138) (163)
---------- ----------
Net investment in leveraged leases $ 32,097 $ 30,679
---------- ----------
---------- ----------
</TABLE>
The net investment is included in "other invested assets" on the balance
sheet.
10. REINSURANCE
The Company has agreements with SLOC which provide that SLOC will reinsure
the mortality risks of the individual life insurance contracts sold by the
Company. Under these agreements basic death benefits and supplementary benefits
are reinsured on a yearly renewable term basis and coinsurance basis,
respectively. Reinsurance transactions under these agreements had the effect of
decreasing income from operations by approximately $2,128,000, $1,381,000 and
$1,603,000 for the years ended December 31, 1998, 1997 and 1996, respectively.
Effective January 1, 1991, the Company entered into an agreement with SLOC
under which certain individual life insurance contracts issued by SLOC were
reinsured by the Company on a 90% coinsurance basis. During 1997 SLOC changed
certain assumptions used in determining the gross and the ceded reserve balance.
The Company reflected the effect of the changes in assumptions to its assumed
reserves as a direct credit to surplus. The effect of the change was a
$39,016,000 decrease in reserves. Also, the agreement required SLOC to reinsure
the mortality risks in excess of $500,000 per policy for the individual life
insurance contracts assumed by the Company. Such death benefits are reinsured on
a yearly renewable term basis. The life reinsurance assumed agreement required
the reinsurer to withhold funds in amounts equal to the reserves assumed. These
agreements had the effect of increasing income from operations by approximately
$24,579,000, $37,050,000 and $35,161,000 for the years ended December 31, 1998,
1997 and 1996, respectively. The Company terminated this agreement effective
October 1, 1998, resulting in an increase in income from operations of
$65,679,000 which included a cash settlement.
68
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
10. REINSURANCE (CONTINUED):
The following are summarized pro-forma results of operations of the
Company for the years ended December 31, 1998, 1997 and 1996 before the effect
of reinsurance transactions with SLOC:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
1998 1997 1996
------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Income:
Premiums, annuity deposits and other revenues $ 2,377,364 $ 2,340,733 $ 1,941,423
Net investment income and realized gains 187,208 298,120 310,172
------------ ------------ ------------
Subtotal 2,564,572 2,638,853 2,251,595
------------ ------------ ------------
Benefits and Expenses:
Policyholder benefits 2,312,247 2,350,354 2,011,998
Other expenses 203,238 187,591 155,531
------------ ------------ ------------
Subtotal 2,515,485 2,537,945 2,167,529
------------ ------------ ------------
Income from operations $ 49,087 $ 100,908 $ 84,066
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
The Company has an agreement with an unrelated company which provides
reinsurance of certain individual life insurance contracts on a modified
coinsurance basis and under which all deficiency reserves related to these
contracts are reinsured. Reinsurance transactions under this agreement had the
effect of increasing income from operations by $3,008,000 in 1998, and
decreasing income from operations by $2,658,000 in 1997 and $46,000 in 1996.
11. WITHDRAWAL CHARACTERISTICS OF ANNUITY ACTUARIAL RESERVES AND DEPOSIT
LIABILITIES
The withdrawal characteristics of general account and separate account
annuity reserves and deposits are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1998
-----------------------------
AMOUNT % OF TOTAL
------------- --------------
(IN THOUSANDS)
<S> <C> <C>
Subject to discretionary withdrawal-with adjustment:
With market value adjustment $ 2,896,529 19
At book value less surrender charges (surrender charge >5%) 10,227,212 66
At book value (minimal or no charge or adjustment) 1,264,453 8
Not subject to discretionary withdrawal provision 1,106,197 7
------------- ---
Total annuity actuarial reserves and deposit liabilities $ 15,494,391 100
------------- ---
------------- ---
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------------------
AMOUNT % OF TOTAL
------------- --------------
(IN THOUSANDS)
<S> <C> <C>
Subject to discretionary withdrawal-with adjustment:
With market value adjustment $ 3,415,394 25
At book value less surrender charges (surrender charge >5%) 7,672,211 57
At book value (minimal or no charge or adjustment) 1,259,698 9
Not subject to discretionary withdrawal provision 1,164,651 9
------------- ---
Total annuity actuarial reserves and deposit liabilities $ 13,511,954 100
------------- ---
------------- ---
</TABLE>
69
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
12. SEGMENT INFORMATION
The Company offers financial products and services such as fixed and
variable annuities, retirement plan services and life insurance on an individual
basis. Within these areas, the Company conducts business principally in two
operating segments and maintains a corporate segment to provide for the capital
needs of the various operating segments and to engage in other financing related
activities.
The Individual Insurance segment markets and administers a variety of life
insurance products sold to individuals and corporate owners of individual life
insurance. The products include whole life, universal life and variable life
products.
The Retirement Products and Services ("RPS") segment markets and
administers individual and group variable annuity products, individual and group
fixed annuity products which include market value adjusted annuities, and other
retirement benefit products.
The following amounts pertain to the various business segments:
<TABLE>
<CAPTION>
FEDERAL
TOTAL TOTAL PRETAX INCOME TOTAL
(IN THOUSANDS) REVENUES EXPENDITURES* INCOME TAXES ASSETS
- ----------------------------------------------------- ------------ -------------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C>
1998
Individual Insurance $ 229,710 $ 144,800 $ 84,910 $ (4,148) $ 199,683
RPS 2,527,608 2,483,715 43,893 12,486 16,123,905
Corporate 10,959 3,042 7,917 3,375 579,033
------------ -------------- ---------- ---------- -------------
Total $ 2,768,277 $ 2,631,557 $ 136,720 $ 11,713 $ 16,902,621
------------ -------------- ---------- ---------- -------------
1997
Individual Insurance 304,141 272,333 31,808 13,825 1,143,697
RPS 2,533,006 2,507,591 25,414 10,667 14,043,221
Corporate 57,897 5,244 52,653 (17,153) 738,439
------------ -------------- ---------- ---------- -------------
Total $ 2,895,044 $ 2,785,169 $ 109,875 $ 7,339 $ 15,925,357
------------ -------------- ---------- ---------- -------------
1996
Individual Insurance 281,309 255,846 25,463 13,931 817,115
RPS 2,174,602 2,151,126 23,476 1,203 12,057,572
Corporate 64,721 898 63,823 (20,534) 689,266
------------ -------------- ---------- ---------- -------------
Total $ 2,520,632 $ 2,407,870 $ 112,762 $ (5,400) $ 13,563,953
------------ -------------- ---------- ---------- -------------
</TABLE>
- ------------------------
* Total expenditures include dividends to policyholders of $(5,981) for 1998,
$33,316 for 1997 and $29,189 for 1996.
13. RETIREMENT PLANS
The Company participates with SLOC in a noncontributory defined benefit
pension plan covering essentially all employees. The benefits are based on years
of service and compensation.
The funding policy for the pension plan is to contribute an amount which
at least satisfies the minimum amount required by ERISA; currently, the plan is
fully funded. The Company is charged for its share of the pension cost based
upon its covered participants. Pension plan assets consist principally of
separate accounts of SLOC.
The Company's share of the group's accrued pension cost was $1,178,000 and
$593,000 at December 31, 1998 and 1997, respectively. The Company's share of net
periodic pension cost was $586,000, $146,000 and $27,000, for 1998, 1997 and
1996, respectively.
70
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
13. RETIREMENT PLANS (CONTINUED):
The Company also participates with SLOC and certain affiliates in a 401(k)
savings plan for which substantially all employees are eligible. The Company
matches, up to specified amounts, employees' contributions to the plan. Company
contributions were $231,000, $259,000 and $233,000 for the years ended December
31, 1998, 1997 and 1996, respectively.
OTHER POST-RETIREMENT BENEFIT PLANS
In addition to pension benefits the Company provides certain health,
dental, and life insurance benefits ("post-retirement benefits") for retired
employees and dependents. Substantially all employees may become eligible for
these benefits if they reach normal retirement age while working for the
Company, or retire early upon satisfying an alternate age plus service
condition. Life insurance benefits are generally set at a fixed amount.
Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 106, "Employer's Accounting for Postretirement
Benefits Other Than Pensions." SFAS No. 106 requires an accrual of the estimated
cost of retiree benefit payments during the years the employee provides
services. SFAS No. 106 allows recognition of the cumulative effect of the
liability in the year of adoption or the amortization of the obligation over a
period of up to 20 years. The obligation of approximately $455,000 is recognized
over a period of ten years. The Company's cash flows are not affected by
implementation of this standard, but implementation decreased net income by
$95,000, $117,000, and $8,000 for the years ended December 31, 1998, 1997, and
1996, respectively. The Company's post retirement health, dental and life
insurance benefits currently are not funded.
71
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
13. RETIREMENT PLANS (CONTINUED):
OTHER POST-RETIREMENT BENEFIT PLANS CONTINUED
The following table sets forth the change in the pension and other
postretirement benefit plans' benefit obligations and assets as well as the
plans' funded status reconciled with the amount shown in the Company's financial
statements at December 31:
<TABLE>
<CAPTION>
PENSION BENEFITS OTHER BENEFITS
1998 1997 1998 1997
---------- ---------- ---------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Change in benefit obligation:
Benefit obligation at beginning of year $ 79,684 $ 70,848 $ 9,845 $ 9,899
Service cost 4,506 4,251 240 306
Interest cost 6,452 5,266 673 725
Amendments -- 1,000 -- --
Actuarial loss (gain) 21,975 -- 308 (801)
Benefits paid (1,825) (1,681) (647) (284)
---------- ---------- ---------- ---------
Benefit obligation at end of year $ 110,792 $ 79,684 $ 10,419 $ 9,845
---------- ---------- ---------- ---------
---------- ---------- ---------- ---------
The Company's share:
Benefit obligation at beginning of year $ 5,094 $ 4,529 $ 385 $ 384
Benefit obligation at end of year $ 9,125 $ 5,094 $ 416 $ 385
Change in plan assets:
Fair value of plan assets at beginning of year $ 136,610 $ 122,807 $ -- $ --
Actual return on plan assets 16,790 15,484 -- --
Employer contribution -- -- 647 284
Benefits paid (1,825) (1,681) (647) (284)
---------- ---------- ---------- ---------
Fair value of plan assets at end of year $ 151,575 $ 136,610 $ -- $ --
---------- ---------- ---------- ---------
---------- ---------- ---------- ---------
Funded status $ 40,783 $ 56,926 $ (10,419) $ (9,845)
Unrecognized net actuarial gain (loss) (2,113) (18,147) 586 257
Unrecognized transition obligation (asset) (24,674) (26,730) 185 230
Unrecognized prior service cost 7,661 8,241 -- --
---------- ---------- ---------- ---------
Prepaid (accrued) benefit cost $ 21,657 $ 20,290 $ (9,648) $ (9,358)
---------- ---------- ---------- ---------
---------- ---------- ---------- ---------
The Company's share of accrued benefit cost $ (1,178) $ (593) $ (195) $ (102)
Weighted-average assumptions as of December 31:
Discount rate 6.75% 7.50% 6.75% 7.50%
Expected return on plan assets 8.00% 7.50% N/A N/A
Rate of compensation increase 4.50% 4.50% N/A N/A
</TABLE>
72
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
13. RETIREMENT PLANS (CONTINUED):
For measurement purposes, a 10.1% annual rate of increase in the per
capita cost of covered health care benefits was assumed for 1998 (5.7% for
dental benefits). The rates were assumed to decrease gradually to 5% for 2005
and remain at that level thereafter.
<TABLE>
<CAPTION>
1998 1997 1998 1997
---------- --------- --------- ---------
<S> <C> <C> <C> <C>
Components of net periodic benefit cost:
Service cost $ 4,506 $ 4,251 $ 240 $ 306
Interest cost 6,452 5,266 673 725
Expected return on plan assets (10,172) (9,163) -- --
Amortization of transition obligation (asset) (2,056) (2,056) 45 45
Amortization of prior service cost 580 517 -- --
Recognized net actuarial (gain) loss (677) (789) (20) 71
---------- --------- --------- ---------
Net periodic benefit cost $ (1,367) $ (1,974) $ 938 $ 1,147
---------- --------- --------- ---------
---------- --------- --------- ---------
The Company's share of net periodic benefit cost $ 586 $ 146 $ 95 $ 117
---------- --------- --------- ---------
---------- --------- --------- ---------
</TABLE>
Assumed health care cost trend rates have a significant effect on the
amounts reported for the health care plans. A one-percentage-point change in
assumed health care cost trend rates would have the following effects:
<TABLE>
<CAPTION>
1-PERCENTAGE-POINT 1-PERCENTAGE-POINT
INCREASE DECREASE
------------------- -------------------
(IN THOUSANDS)
<S> <C> <C>
Effect on total of service and interest cost components $ 210 $ (170)
Effect on postretirement benefit obligation 2,026 (1,697)
</TABLE>
73
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
14. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the carrying amounts and estimated fair
values of the Company's financial instruments at December 31, 1998 and 1997:
<TABLE>
<CAPTION>
DECEMBER 31, 1998
---------------------------------------
CARRYING AMOUNT ESTIMATED FAIR VALUE
----------------- --------------------
(IN THOUSANDS)
<S> <C> <C>
ASSETS:
Bonds $ 2,026,868 $ 2,153,953
Mortgages 535,003 556,143
Derivatives -- 771
LIABILITIES:
Insurance reserves $ 121,100 $ 121,100
Individual annuities 274,448 271,849
Pension products 1,104,489 1,145,351
<CAPTION>
DECEMBER 31, 1997
---------------------------------------
CARRYING AMOUNT ESTIMATED FAIR VALUE
----------------- --------------------
(IN THOUSANDS)
<S> <C> <C>
ASSETS:
Bonds $ 2,451,731 $ 2,569,199
Mortgages 684,035 706,975
LIABILITIES:
Insurance reserves $ 123,128 $ 123,128
Individual annuities 307,668 302,165
Pension products 1,527,433 1,561,108
Derivatives -- (1,716)
</TABLE>
The major methods and assumptions used in estimating the fair values of
financial instruments are as follows:
The fair values of short-term bonds are estimated to be the amortized
cost. The fair values of long-term bonds which are publicly traded are based
upon market prices or dealer quotes. For privately placed bonds, fair values are
estimated by taking into account prices for publicly traded bonds of similar
credit risk and maturity and repayment and liquidity characteristics.
The fair values of the Company's general account insurance reserves and
liabilities under investment-type contracts (insurance, annuity and pension
contracts that do not involve mortality or morbidity risks) are estimated using
discounted cash flow analyses or surrender values. Those contracts that are
deemed to have short-term guarantees have a carrying amount equal to the
estimated market value.
The fair values of mortgages are estimated by discounting future cash
flows using current rates at which similar loans would be made to borrowers with
similar credit ratings and for the same remaining maturities.
The fair values of derivative financial instruments are estimated using
the process described in Note 8.
15. STATUTORY INVESTMENT VALUATION RESERVES
The asset valuation reserve ("AVR") provides a reserve for losses from
investments in bonds, stocks, mortgage loans, real estate and other invested
assets with related increases or decreases being recorded directly to surplus.
74
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
15. STATUTORY INVESTMENT VALUATION RESERVES (CONTINUED):
Realized capital gains and losses on bonds and mortgages which relate to
changes in levels of interest rates are charged or credited to an interest
maintenance reserve ("IMR") and amortized into income over the remaining
contractual life of the security sold.
The table shown below presents changes in the major elements of the AVR
and IMR.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1998 1997
-------------------- --------------------
AVR IMR AVR IMR
--------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Balance, beginning of year $ 47,605 $ 33,830 $ 53,911 $ 28,675
Net realized investment gains, net of tax 256 8,942 17,400 6,321
Amortization of net investment gains -- (2,282) -- (1,166)
Unrealized investment losses (6,550) -- (2,340) --
Required by formula 3,081 -- (21,366) --
--------- --------- --------- ---------
Balance, end of year $ 44,392 $ 40,490 $ 47,605 $ 33,830
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
16. FEDERAL INCOME TAXES
The Company and its subsidiaries file a consolidated federal income tax
return. Federal income taxes are calculated for the consolidated group based
upon amounts determined to be payable as a result of operations within the
current year. No provision is recognized for timing differences which may exist
between financial statement and taxable income. Such timing differences include
reserves, depreciation and accrual of market discount on bonds. Cash payments
for federal income taxes were approximately $48,144,000, $31,000,000 and
$19,264,000 for the years ended December 31, 1998, 1997 and 1996, respectively.
The Company is currently undergoing an audit by the Internal Revenue Service.
The Company believes that there will be no material audit adjustments for the
periods under examination.
17. SURPLUS NOTES AND NOTES RECEIVABLE (PAYABLE)
On December 22, 1997, the Company issued a $250,000,000 surplus note to
Life Holdco. This note has an interest rate of 8.625% and is due on or after
November 6, 2027.
On May 9, 1997, the Company issued a short-term note of $600,000,000 to
Life Holdco at an interest rate of 5.10%, which was extended at various interest
rates. This note was repaid on December 22, 1997.
On December 19, 1995, the Company issued surplus notes totaling
$315,000,000 to an affiliate, Sun Canada Financial Co., at interest rates
between 5.75% and 7.25%. Of these notes, $157,500,000 will mature in the year
2007 and $157,500,000 will mature in the year 2015. Interest on these notes is
payable semiannually.
Principal and interest on surplus notes are payable only to the extent
that the Company meets specified requirements regarding free surplus exclusive
of the principal amount and accrued interest, if any, on these notes and with
the consent of the Delaware Insurance Commissioner.
The Company accrued $4,259,000 and $ 964,000 for interest on surplus notes
for the years ended December 31, 1998 and 1997, respectively.
The Company accrued $4,259,000 and $964,000 for interest on surplus notes
for the years ended December 31, 1998 and 1997, respectively.
75
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO STATUTORY FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
17. SURPLUS NOTES AND NOTES RECEIVABLE (PAYABLE) (CONTINUED):
The Company expensed $44,903,000, $42,481,000 and $23,061,000 for interest
on surplus notes and notes payable for the years ended December 31, 1998, 1997
and 1996, respectively.
18. TRANSACTIONS WITH AFFILIATES
The Company has an agreement with SLOC which provides that SLOC will
furnish, as requested, personnel as well as certain services and facilities on a
cost-reimbursement basis. Expenses under this agreement amounted to
approximately $16,344,000 in 1998, $15,997,000 in 1997, and $20,192,000 in 1996.
The Company leases office space to SLOC under lease agreements with terms
expiring in September, 1999 and options to extend the terms for each of thirteen
successive five-year terms at fair market rental not to exceed 125% of the fixed
rent for the term which is ending. Rent received by the Company under the leases
for 1998 amounted to approximately $6,856,000.
19. RISK-BASED CAPITAL
Effective December 31, 1993, the NAIC adopted risk-based capital
requirements for life insurance companies. The risk-based capital requirements
provide a method for measuring the minimum acceptable amount of adjusted capital
that a life insurer should have, as determined under statutory accounting
practices, taking into account the risk characteristics of its investments and
products. The Company has met the minimum risk-based capital requirements at
December 31, 1998, 1997 and 1996.
20. ACCOUNTING POLICIES AND PRINCIPLES
The financial statements of the Company have been prepared on the basis of
statutory accounting practices which, prior to 1996, were considered by the
insurance industry and the accounting profession to be in accordance with GAAP
for mutual life insurance companies. The primary differences between statutory
accounting practices and GAAP are described as follows. Under statutory
accounting practices, financial statements are not consolidated and investments
in subsidiaries are shown at net equity value. Accordingly, the assets,
liabilities and results of operations of the Company's subsidiaries are not
consolidated with the assets, liabilities and results of operations,
respectively, of the Company. Changes in net equity value of the common stock of
the Company's United States life insurance subsidiaries are directly reflected
in the Company's surplus. Changes in the net equity value of the common stock of
all other subsidiaries are directly reflected in the Company's Asset Valuation
Reserve. Dividends paid by subsidiaries to the Company are included in the
Company's net investment income.
Other differences between statutory accounting practices and GAAP include
the following: statutory accounting practices do not recognize the following
assets or liabilities which are reflected under GAAP: deferred policy
acquisition costs, deferred federal income taxes and statutory nonadmitted
assets. Asset Valuation Reserves and Interest Maintenance Reserves are
established under statutory accounting practices but not under GAAP. Methods for
calculating real estate depreciation and investment valuation allowances differ
under statutory accounting practices and GAAP. Actuarial assumptions and
reserving methods differ under statutory accounting practices and GAAP. Premiums
for universal life and investment-type products are recognized as income for
statutory purposes and as deposits to policyholders' accounts for GAAP.
Because the Company's management uses financial information prepared in
conformity with accounting principles generally accepted in Canada in the normal
course of business, the management of Sun Life Assurance Company of Canada
(U.S.) has determined that the cost of complying with Statement No. 120,
"Accounting and Reporting by Mutual Insurance Enterprises and by Insurance
Enterprises for Certain Long Duration Participating Contracts", exceeds the
benefits that the Company, or the users of its financial statements, would
experience. Consequently, the Company has elected not to apply such standards in
the preparation of these financial statements.
76
<PAGE>
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
We have audited the accompanying statutory statements of admitted assets,
liabilities and capital stock and surplus of Sun Life Assurance Company of
Canada (U.S.) (the "Company") as of December 31, 1998 and 1997, and the related
statutory statements of operations, changes in capital stock and surplus, and
cash flow for each of the three years in the period ended December 31, 1998.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As described more fully in Notes 1 and 20 to the financial statements, the
Company prepared these financial statements using accounting practices
prescribed or permitted by the Insurance Department of the State of Delaware,
which is a comprehensive basis of accounting other than generally accepted
accounting principles. The effects on the financial statements of the
differences between the statutory basis of accounting and generally accepted
accounting principles, although not reasonably determinable, are presumed to be
material.
In our opinion, the statutory financial statements referred to above
present fairly, in all material respects, the admitted assets, liabilities, and
capital stock and surplus of Sun Life Assurance Company of Canada (U.S.) as of
December 31, 1998 and 1997, and the results of its operations and its cash flow
for each of the three years in the period ended December 31, 1998 on the basis
of accounting described in Notes 1 and 20.
However, because of the differences between the two bases of accounting
referred to in the second preceding paragraph, in our opinion, the statutory
financial statements referred to above do not present fairly, in conformity with
generally accepted accounting principles, the financial position of Sun Life
Assurance Company of Canada (U.S.) as of December 31, 1998 and 1997 or the
results of its operations or its cash flow for each of the three years in the
period ended December 31, 1998.
As management has stated in Note 20, because the Company's management uses
financial information prepared in accordance with accounting principles
generally accepted in Canada in the normal course of business, the management of
Sun Life Assurance Company of Canada (U.S.) has determined that the cost of
complying with Statement No. 120, ACCOUNTING AND REPORTING BY MUTUAL LIFE
INSURANCE ENTERPRISES AND BY INSURANCE ENTERPRISES FOR CERTAIN LONG-DURATION
PARTICIPATING CONTRACTS, would exceed the benefits that the Company, or the
users of its financial statements, would experience. Consequently, the Company
has elected not to apply such standards in the preparation of these financial
statements.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
February 5, 1999
77
<PAGE>
TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION
<TABLE>
<S> <C>
Calculation of Performance Data -- Average Annual Total Return.......................
Non-Standardized Investment Performance..............................................
Advertising and Sales Literature.....................................................
Calculations.........................................................................
Example of Variable Accumulation Unit Value Calculation............................
Example of Variable Annuity Unit Calculation.......................................
Example of Variable Annuity Payment Calculation....................................
Calculation of Annuity Unit Values.................................................
Distribution of the Contracts........................................................
Designation and Change of Beneficiary................................................
Custodian............................................................................
Financial Statements.................................................................
</TABLE>
78
<PAGE>
This Prospectus sets forth information about the Contracts and the
Variable Account that a prospective purchaser should know before investing.
Additional information about the Contracts and the Variable Account has been
filed with the Securities and Exchange Commission in a Statement of Additional
Information dated May 1, 1999 which is incorporated herein by reference. The
Statement of Additional Information is available upon request and without charge
from Sun Life Assurance Company of Canada (U.S.). To receive a copy, return this
request form to the address shown below or telephone (617) 348-9600 or (888)
786-2435.
- --------------------------------------------------------------------------------
To: Sun Life Assurance Company of Canada (U.S.)
Annuity Service Mailing Address:
c/o Retirement Products and Services
P.O. Box 9133
Boston, Massachusetts 02117
Please send me a Statement of Additional Information for
Futurity II Variable and Fixed Annuity
Sun Life of Canada (U.S.) Variable Account F.
Name
- --------------------------------------------------------------
Address
- --------------------------------------------------------------
- -------------------------------------------------------------------------
City
- ------------------------------------ State
- -------------- Zip
- ------
Telephone
- ----------------------------------------------------------------
79
<PAGE>
APPENDIX A
GLOSSARY
The following terms as used in this Prospectus have the indicated
meanings:
ACCOUNT or PARTICIPANT ACCOUNT: An account established for each
Participant to which Net Purchase Payments are credited.
ACCOUNT VALUE: The Variable Accumulation Value, if any, plus the Fixed
Accumulation Value, if any, of your Account for any Valuation Period.
ACCOUNT YEAR AND ACCOUNT ANNIVERSARY: Your first Account Year is the
period of (a) 12 full calendar months plus (b) the part of the calendar month in
which we issue your Contract (if not on the first day of the month), beginning
with the Contract Date. Your Account Anniversary is the first day immediately
after the end of an Account Year. Each Account Year after the first is the 12
calendar month period that begins on your Account Anniversary. If, for example,
the Contract Date is in March, the first Account Year will be determined from
the Contract Date but will end on the last day of March in the following year;
your Account Anniversary is April 1 and all Account Years after the first will
be measured from April 1.
ACCUMULATION PHASE: The period before the Annuity Commencement Date and
during the lifetime of the Annuitant during which you make Purchase Payments
under the Contract. This is called the "Accumulation Period" in the Contract.
ANNUITANT: The person or persons to whom the first annuity payment is
made. If the Annuitant dies prior to the Annuity Commencement Date, the new
Annuitant will be the Co-Annuitant, if any. If the Co-Annuitant dies or if no
Co-Annuitant is named, the Participant becomes the Annuitant upon the
Annuitant's death prior to the Annuity Commencement Date. If you have not named
a sole Annuitant on the 30th day before the Annuity Commencement Date and both
the Annuitant and Co-Annuitant are living, the Co-Annuitant will be the sole
Annuitant during the Income Phase
*ANNUITY COMMENCEMENT DATE: The date on which the first annuity payment
under each Contract is to be made.
*ANNUITY OPTION: The method you choose for making annuity payments.
ANNUITY UNIT: A unit of measure used in the calculation of the amount of
the second and each subsequent variable annuity payment from the Variable
Account.
APPLICATION: The document signed by you or other evidence acceptable to us
that serves as your application for participation under a Group Contract or
purchase of an Individual Contract.
*BENEFICIARY: Prior to the Annuity Commencement Date, the person or entity
having the right to receive the death benefit and, for Non-Qualified Contracts,
who, in the event of the Participant's death, is the "designated beneficiary"
for purposes of Section 72(s) of the Internal Revenue Code. After the Annuity
Commencement Date, the person or entity having the right to receive any payments
due under the Annuity Option elected, if applicable, upon the death of the
Payee.
BUSINESS DAY: Any day the New York Stock Exchange is open for trading.
CERTIFICATE: The document for each Participant which evidences the
coverage of the Participant under a Group Contract.
COMPANY: Sun Life Assurance Company of Canada (U.S.).
CONTRACT DATE: The date on which we issue your Contract. This is called
the "Date of Coverage" in the Contract.
DEATH BENEFIT DATE: If you have elected a death benefit payment option
before your death that remains in effect, the date on which we receive Due Proof
of Death. If your Beneficiary elects the
* You specify these items on the Contract Specifications page or Certificate
Specifications page and may change them, as we describe in this Prospectus.
80
<PAGE>
death benefit payment option, the later of (a) the date on which we receive the
Beneficiary's election and (b) the date on which we receive Due Proof of Death.
If we do not receive the Beneficiary's election within 60 days after we receive
Due Proof of Death, the Death Benefit Date will be the last day of the 60 day
period and we will pay the death benefit in cash.
DUE PROOF OF DEATH: An original certified copy of an official death
certificate, an original certified copy of a decree of a court of competent
jurisdiction as to the finding of death, or any other proof satisfactory to the
Company.
EXPIRATION DATE: The last day of a Guarantee Period.
FIXED ACCOUNT: The general account of the Company, consisting of all
assets of the Company other than those allocated to a separate account of the
Company.
FIXED ACCOUNT VALUE: The value of that portion of your Account allocated
to the Fixed Account.
FIXED ANNUITY: An annuity with payments which do not vary as to dollar
amount.
FUND: A registered management investment company, or series thereof, in
which assets of a Sub-Account may be invested.
GROUP CONTRACT: A Contract issued by the Company on a group basis.
GUARANTEE AMOUNT: Each separate allocation of your Account Value allocated
to a particular Guarantee Period (including interest earned thereon).
GUARANTEE PERIOD: The period for which a Guaranteed Interest Rate is
credited.
GUARANTEED INTEREST RATE: The rate of interest we credit on a compound
annual basis during any Guarantee Period.
INCOME PHASE: The period on and after the Annuity Commencement Date and
during the lifetime of the Annuitant during which we make annuity payments under
the Contract.
INDIVIDUAL CONTRACT: A Contract issued by the Company on an individual
basis.
NET INVESTMENT FACTOR: An index applied to measure the investment
performance of a Sub-Account from one Valuation Period to the next. The Net
Investment Factor may be greater or less than or equal to one.
NET PURCHASE PAYMENT: The portion of a Purchase Payment which remains
after the deduction of any applicable premium tax or similar tax.
NON-QUALIFIED CONTRACT: A Contract used in connection with a retirement
plan that does not receive favorable federal income tax treatment under Sections
401, 403, 408, or 408A of the Internal Revenue Code. The Participant's interest
in the Contract must be owned by a natural person or agent for a natural person
for the Contract to receive favorable income tax treatment as an annuity.
OWNER: The person, persons or entity entitled to the ownership rights
stated in a Group Contract and in whose name or names the Group Contract is
issued. The Owner may designate a trustee or custodian of a retirement plan
which meets the requirements of Section 401, Section 408(c), Section 408(k),
Section 408(p) or Section 408A of the Internal Revenue Code to serve as legal
owner of assets of a retirement plan, but the term "Owner," as used herein,
shall refer to the organization entering into the Group Contract.
PARTICIPANT: In the case of an Individual Contract, the owner of the
Contract. In the case of a Group Contract, the person named in the Contract who
is entitled to exercise all rights and privileges of ownership under the
Contract, except as reserved by the Owner.
PAYEE: A recipient of payments under a Contract. The term includes an
Annuitant or a Beneficiary who becomes entitled to benefits upon the death of
the Participant.
81
<PAGE>
PURCHASE PAYMENT (PAYMENT): An amount paid to the Company as consideration
for the benefits provided by a Contract.
QUALIFIED CONTRACT: A Contract used in connection with a retirement plan
which may receive favorable federal income tax treatment under Sections 401,
403, 408 or 408A of the Internal Revenue Code of 1986, as amended.
SERIES FUND: MFS/Sun Life Series Trust.
SEVEN-YEAR ANNIVERSARY: The seventh Account Anniversary and each
succeeding Account Anniversary occurring at any seven year interval thereafter;
for example, the 14th, 21st and 28th Account Anniversaries.
SUB-ACCOUNT: That portion of the Variable Account which invests in shares
of a specific Fund or series of a Fund.
VALUATION PERIOD: The period of time from one determination of Variable
Accumulation Unit or Annuity Unit values to the next subsequent determination of
these values. Value determinations are made as of the close of the New York
Stock Exchange on each day that the Exchange is open for trading.
VARIABLE ACCOUNT: Variable Account F of the Company, which is a separate
account of the Company consisting of assets set aside by the Company, the
investment performance of which is kept separate from that of the general assets
of the Company.
VARIABLE ACCUMULATION UNIT: A unit of measure used in the calculation of
Variable Account Value.
VARIABLE ACCOUNT VALUE: The value of that portion of your Account
allocated to the Variable Account.
VARIABLE ANNUITY: An annuity with payments which vary as to dollar amount
in relation to the investment performance of the Variable Account.
82
<PAGE>
APPENDIX B
CONDENSED FINANCIAL INFORMATION - ACCUMULATION UNIT VALUES
The following information should be read in conjunction with the Variable
Account's Financial Statements appearing the Statement of Additional
Information. All of the Variable Account's Financial Statements have been
audited by Deloitte & Touche LLP, independent certified public accountants.
<TABLE>
<CAPTION>
PERIOD ENDED
DECEMBER 31, 1998*
--------------------
<S> <C>
AIM V.I. CAPITAL APPRECIATION FUND
Unit Value:
Beginning of Period..................................................................... $ 10.0000
End of Period........................................................................... $ 11.2991
Units outstanding at end of period........................................................ 100
AIM V.I. GROWTH FUND
Unit Value:
Beginning of Period..................................................................... $ 10.0000
End of Period........................................................................... $ 11.3293
Units outstanding at end of period........................................................ 1,049
AIM V.I. GROWTH AND INCOME FUND
Unit Value:
Beginning of Period..................................................................... $ 10.0000
End of Period........................................................................... $ 11.0655
Units outstanding at end of period........................................................ 1,704
AIM V.I. INTERNATIONAL EQUITY FUND
Unit Value:
Beginning of Period..................................................................... $ 10.0000
End of Period........................................................................... $ 10.5553
Units outstanding at end of period........................................................ 2,553
ALGER AMERICAN GROWTH PORTFOLIO
Unit Value:
Beginning of Period..................................................................... $ 10.0000
End of Period........................................................................... $ 11.1993
Units outstanding at end of period........................................................ 2,044
ALGER AMERICAN INCOME AND GROWTH PORTFOLIO
Unit Value:
Beginning of Period..................................................................... $ 10.0000
End of Period........................................................................... $ 11.0273
Units outstanding at end of period........................................................ 1,785
ALGER AMERICAN SMALL CAPITALIZATION PORTFOLIO
Unit Value:
Beginning of Period..................................................................... $ 10.0000
End of Period........................................................................... $ 11.3603
Units outstanding at end of period........................................................ 100
GOLDMAN SACHS CORE LARGE CAP GROWTH FUND
Unit Value:
Beginning of Period..................................................................... $ 10.0000
End of Period........................................................................... $ 11.0085
Units outstanding at end of period........................................................ 786
GOLDMAN SACHS CORE SMALL CAP EQUITY FUND
Unit Value:
Beginning of Period..................................................................... $ 10.0000
End of Period........................................................................... $ 10.8679
Units outstanding at end of period........................................................ 100
</TABLE>
83
<PAGE>
<TABLE>
<CAPTION>
PERIOD ENDED
DECEMBER 31, 1998*
--------------------
GOLDMAN SACHS CORE U.S. EQUITY FUND
<S> <C>
Unit Value:
Beginning of Period..................................................................... $ 10.0000
End of Period........................................................................... $ 10.8370
Units outstanding at end of period........................................................ 2,341
GOLDMAN SACHS GROWTH AND INCOME FUND
Unit Value:
Beginning of Period..................................................................... $ 10.0000
End of Period........................................................................... $ 10.3642
Units outstanding at end of period........................................................ 100
GOLDMAN SACHS INTERNATIONAL EQUITY FUND
Unit Value:
Beginning of Period..................................................................... $ 10.0000
End of Period........................................................................... $ 10.5999
Units outstanding at end of period........................................................ 578
J.P. MORGAN SERIES TRUST II EQUITY PORTFOLIO
Unit Value:
Beginning of Period..................................................................... $ 10.0000
End of Period........................................................................... $ 10.7114
Units outstanding at end of period........................................................ 474
J.P. MORGAN SERIES TRUST II INTERNATIONAL OPPORTUNITIES PORTFOLIO
Unit Value:
Beginning of Period..................................................................... $ 10.0000
End of Period........................................................................... $ 10.5058
Units outstanding at end of period........................................................ 100
J.P. MORGAN SERIES TRUST II SMALL COMPANY PORTFOLIO
Unit Value:
Beginning of Period..................................................................... $ 10.0000
End of Period........................................................................... $ 10.8537
Units outstanding at end of period........................................................ 100
LORD ABBETT SERIES FUND GROWTH AND INCOME PORTFOLIO
Unit Value:
Beginning of Period..................................................................... $ 10.0000
End of Period........................................................................... $ 10.5917
Units outstanding at end of period........................................................ 1,763
MFS/SUN LIFE CAPITAL APPRECIATION SERIES
Unit Value:
Beginning of Period..................................................................... $ 10.0000
End of Period........................................................................... $ 11.1244
Units outstanding at end of period........................................................ 2,367
MFS/SUN LIFE EMERGING GROWTH SERIES
Unit Value:
Beginning of Period..................................................................... $ 10.0000
End of Period........................................................................... $ 11.2723
Units outstanding at end of period........................................................ 3,662
MFS/SUN LIFE GOVERNMENT SECURITIES SERIES
Unit Value:
Beginning of Period..................................................................... $ 10.0000
End of Period........................................................................... $ 9.9595
Units outstanding at end of period........................................................ 1,027
</TABLE>
84
<PAGE>
<TABLE>
<CAPTION>
PERIOD ENDED
DECEMBER 31, 1998*
--------------------
MFS/SUN LIFE HIGH YIELD SERIES
<S> <C>
Unit Value:
Beginning of Period..................................................................... $ 10.0000
End of Period........................................................................... $ 9.9916
Units outstanding at end of period........................................................ 729
MFS/SUN LIFE UTILITIES SERIES
Unit Value:
Beginning of Period..................................................................... $ 10.0000
End of Period........................................................................... $ 10.5369
Units outstanding at end of period........................................................ 821
OCC ACCUMULATION TRUST EQUITY PORTFOLIO
Unit Value:
Beginning of Period..................................................................... $ 10.0000
End of Period........................................................................... $ 10.5784
Units outstanding at end of period........................................................ 1,517
OCC ACCUMULATION TRUST MANAGED PORTFOLIO
Unit Value:
Beginning of Period..................................................................... $ 10.0000
End of Period........................................................................... $ 10.5329
Units outstanding at end of period........................................................ 100
OCC ACCUMULATION TRUST MID CAP PORTFOLIO
Unit Value:
Beginning of Period..................................................................... $ 10.0000
End of Period........................................................................... $ 10.6171
Units outstanding at end of period........................................................ 150
OCC ACCUMULATION TRUST SMALL CAP PORTFOLIO
Unit Value:
Beginning of Period..................................................................... $ 10.0000
End of Period........................................................................... $ 10.3520
Units outstanding at end of period........................................................ 100
SUN CAPITAL MONEY MARKET FUND
Unit Value:
Beginning of Period..................................................................... $ 10.0000
End of Period........................................................................... $ 10.0143
Units outstanding at end of period........................................................ 200
SUN CAPITAL INVESTMENT GRADE BOND FUND
Unit Value:
Beginning of Period..................................................................... $ 10.0000
End of Period........................................................................... $ 9.9809
Units outstanding at end of period........................................................ 1,806
SUN CAPITAL REAL ESTATE FUND
Unit Value:
Beginning of Period..................................................................... $ 10.0000
End of Period........................................................................... $ 10.0837
Units outstanding at end of period........................................................ 705
</TABLE>
85
<PAGE>
<TABLE>
<CAPTION>
PERIOD ENDED
DECEMBER 31, 1998*
--------------------
WARBURG PINCUS TRUST EMERGING MARKETS PORTFOLIO
<S> <C>
Unit Value:
Beginning of Period..................................................................... $ 10.0000
End of Period........................................................................... $ 10.4931
Units outstanding at end of period........................................................ 100
WARBURG PINCUS TRUST INTERNATIONAL EQUITY PORTFOLIO
Unit Value:
Beginning of Period..................................................................... $ 10.0000
End of Period........................................................................... $ 10.3709
Units outstanding at end of period........................................................ 100
WARBURG PINCUS TRUST POST-VENTURE CAPITAL PORTFOLIO
Unit Value:
Beginning of Period..................................................................... $ 10.0000
End of Period........................................................................... $ 11.2546
Units outstanding at end of period........................................................ 100
WARBURG PINCUS TRUST SMALL COMPANY GROWTH PORTFOLIO
Unit Value:
Beginning of Period..................................................................... $ 10.0000
End of Period........................................................................... $ 11.0954
Units outstanding at end of period........................................................ 100
</TABLE>
- ------------------------
* From commencement of operations on December 9, 1998 to December 31, 1998.
86
<PAGE>
APPENDIX C
WITHDRAWALS, WITHDRAWAL CHARGES AND THE MARKET VALUE ADJUSTMENT
PART 1: VARIABLE ACCOUNT (THE MARKET VALUE ADJUSTMENT DOES NOT APPLY TO THE
VARIABLE ACCOUNT)
WITHDRAWAL CHARGE CALCULATION:
FULL WITHDRAWAL:
Assume a Purchase Payment of $40,000 is made on the Contract Date, no
additional Purchase Payments are made and there are no partial withdrawals. The
table below presents four examples of the withdrawal charge resulting from a
full withdrawal of your Account, based on hypothetical Account Values.
<TABLE>
<CAPTION>
HYPOTHETICAL FREE NEW WITHDRAWAL WITHDRAWAL
ACCOUNT ACCOUNT WITHDRAWAL PAYMENTS CHARGE CHARGE
YEAR VALUE AMOUNT WITHDRAWN PERCENTAGE AMOUNT
--------------- ------------ ----------- ----------- --------------- -----------
<S> <C> <C> <C> <C> <C> <C>
(a) 1 $ 41,000 $ 4,000 $ 37,000 6.00% $ 2,220
(b) 3 $ 52,000 $ 12,000 $ 40,000 5.00% $ 2,000
(c) 7 $ 80,000 $ 28,000 $ 40,000 3.00% $ 1,200
(d) 9 $ 98,000 $ 68,000 0 0.00% 0
</TABLE>
(a) The free withdrawal amount in any Account Year is equal to (1) the Annual
Withdrawal Allowance for that year (i.e., 10% of all Purchase Payments made
in the last seven Account Years ("New Payments")); plus (2) any unused
Annual Withdrawal Allowances from previous years; plus (3) any Purchase
Payments made before the last seven Account Years ("Old Payments") not
previously withdrawn. In Account Year 1, the free withdrawal amount is
$4,000 (the Annual Withdrawal Allowance for that year) because there are no
unused Annual Withdrawal Allowances from previous years and no Old Payments.
The $41,000 full withdrawal is attributed first to the $4,000 free
withdrawal amount. The remaining $37,000 is withdrawn from the Purchase
Payment made in Account Year 1 and is subject to the withdrawal charge.
(b) In Account Year 3, the free withdrawal amount is $12,000 (the $4,000 Annual
Withdrawal Allowance for the current year plus the unused $4,000 Annual
Withdrawal Allowances for each of Account Years 1 and 2). The $52,000 full
withdrawal is attributed first to the free withdrawal amount and the
remaining $40,000 is withdrawn from the Purchase Payment made in Account
Year 1.
(c) In Account Year 7, the free withdrawal amount is $28,000 (the $4,000 Annual
Withdrawal Allowance for the current Account Year plus the unused Annual
Withdrawal Allowance of $4,000 for each of Account Years 1 through 6). The
$80,000 full withdrawal is attributed first to the free withdrawal amount.
The next $40,000 is withdrawn from the Purchase Payment made in Account Year
1 and is subject to the withdrawal charge. The remaining $12,000 exceeds the
total of the free withdrawal amount plus all New Payments not previously
withdrawn, so it is not subject to the withdrawal charge.
(d) In Account Year 9, the free withdrawal amount is $68,000, calculated as
follows. There are no Annual Withdrawal Allowances for Account Years 8 or 9
because there are no New Payments in those years. The $40,000 Purchase
Payment made in Account Year 1 is now an Old Payment that constitutes a
portion of the free withdrawal amount. In addition, the unused Annual
Withdrawal Allowances of $4,000 for each of Account Years 1 through 7 are
carried forward and available for use in Account Year 9. The $98,000 full
withdrawal is attributed first to the free withdrawal amount. Because the
remaining $30,000 is not withdrawn from New Payments, this part of the
withdrawal also will not be subject to the withdrawal charge.
PARTIAL WITHDRAWAL:
Assume a single Purchase Payment of $40,000 is made on the Contract Date,
no additional Purchase Payments are made, no partial withdrawals have been taken
prior to the fifth Account Year,
87
<PAGE>
and there are a series of three partial withdrawals made during the fifth
Account Year of $9,000, $12,000, and $15,000.
<TABLE>
<CAPTION>
HYPOTHETICAL PARTIAL FREE NEW WITHDRAWAL WITHDRAWAL
ACCOUNT WITHDRAWAL WITHDRAWAL PAYMENTS CHARGE CHARGE
VALUE AMOUNT AMOUNT WITHDRAWN PERCENTAGE AMOUNT
------------ ----------- ----------- ----------- --------------- -------------
<S> <C> <C> <C> <C> <C> <C>
(a) $ 64,000 $ 9,000 $ 20,000 $ 0 4.00% $ 0
(b) $ 56,000 $ 12,000 $ 11,000 $ 1,000 4.00% $ 40
(c) $ 40,000 $ 15,000 $ 0 $ 15,000 4.00% $ 600
</TABLE>
(a) In the fifth Account Year, the free withdrawal amount is equal to $20,000
(the $4,000 Annual Withdrawal Allowance for the current year, plus the
unused $4,000 for each of the Account Years 1 through 4). The partial
withdrawal amount ($9,000) is less than the free withdrawal amount so no New
Payments are withdrawn and no withdrawal charge applies.
(b) Since a partial withdrawal of $9,000 was taken, the remaining free
withdrawal amount is equal to $11,000. The $12,000 partial withdrawal will
first be applied against the $11,000 free withdrawal amount. The remaining
$1,000 will be withdrawn from the $40,000 New Payment, incurring a
withdrawal charge of $40.
(c) The free withdrawal amount is zero since the previous partial withdrawals
have already used the free withdrawal amount. The entire partial withdrawal
amount will result in New Payments being withdrawn and will incur a
withdrawal charge.
PART 2 -- FIXED ACCOUNT -- EXAMPLES OF THE MARKET VALUE ADJUSTMENT ("MVA")
The MVA Factor is:
<TABLE>
<C> <C>
N/12
1 + I
( -------- ) -1
1 + J + b
</TABLE>
These examples assume the following:
1) The Guarantee Amount was allocated to a five year Guarantee Period
with a Guaranteed Interest Rate of 6% or .06.
2) The date of surrender is two years from the Expiration Date (N =
24).
3) The value of the Guarantee Amount on the date of surrender is
$11,910.16.
4) The interest earned in the current Account Year is $674.16.
5) No transfers or partial withdrawals affecting this Guarantee Amount
have been made.
6) Withdrawal charges, if any, are calculated in the same manner as
shown in the examples in Part 1.
EXAMPLE OF A NEGATIVE MVA:
Assume that on the date of surrender, the current rate (J) is 8% or .08
and the b factor is zero.
<TABLE>
<C> <S> <C> <C>
N/12
1 + I
The MVA factor = ( -------- ) -1
1 + J + b
</TABLE>
<TABLE>
<C> <S> <C> <C>
24/12
1 + .06
= ( ------ ) -1
1 + .08
= (.981)(2) -1
= .963 -1
= - .037
</TABLE>
88
<PAGE>
The value of the Guarantee Amount less interest credited to the Guarantee
Amount in the current Account Year is multiplied by the MVA factor to determine
the MVA:
($11,910.16 - $674.16) X (-.037) = -$415.73
-$415.73 represents the MVA that will be deducted from the value of the
Guarantee Amount before the deduction of any withdrawal charge.
For a partial withdrawal of $2,000 from this Guarantee Amount, the MVA
would be ($2,000.00 - $674.16) X (-.037) = -$49.06. -$49.06 represents the MVA
that will be deducted from the partial withdrawal amount before the deduction of
any withdrawal charge.
EXAMPLE OF A POSITIVE MVA:
Assume that on the date of surrender, the current rate (J) is 5% or .05
and the b factor is zero.
<TABLE>
<C> <S> <C> <C>
N/12
1 + I
The MVA factor = ( -------- ) -1
1 + J + b
</TABLE>
<TABLE>
<C> <S> <C> <C>
24/12
1 + .06
= ( ------ ) -1
1 + .05
= (1.010)(2) -1
= 1.019 -1
= .019
</TABLE>
The value of the Guarantee Amount less interested credit to the Guarantee
Amount in the current Account Year is multiplied by the MVA factor to determine
the MVA
($11,910.16 - $674.16) X .019 = $213.48
$213.48 represents the MVA that would be added to the value of the
Guarantee Amount before the deduction of any withdrawal charge.
For a partial withdrawal of $2,000 from this Guarantee Amount, the MVA
would be ($2,000.00 - $674.16) X .019 = $25.19.
$25.19 represents the MVA that would be added to the value of the partial
withdrawal amount before the deduction of any withdrawal charge.
89
<PAGE>
<TABLE>
<S> <C>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
ANNUITY SERVICE MAILING ADDRESS:
C/O RETIREMENT PRODUCTS AND SERVICES
P.O. BOX 9133
BOSTON, MASSACHUSETTS 02117
TELEPHONE:
Toll Free (888) 786-2435
In Massachusetts (617) 348-9600
GENERAL DISTRIBUTOR
Clarendon Insurance Agency, Inc.
One Sun Life Executive Park
Wellesley Hills, Massachusetts 02481
AUDITORS
Deloitte Touche LLP
125 Summer Street
Boston, Massachusetts 02110
FUT II 5/99
</TABLE>
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS.
Item 14. Other Expenses of Issuance and Distribution
The expenses incurred by the registrant in connection with the issuance
and distribution of the securities registered hereby, other than underwriting
discounts and commissions, are as follows*:
<TABLE>
<S> <C>
SEC Registration Fee.................. $556,000
Printing and Engraving................ 75,000
Accounting Fees and Expenses.......... 10,000
Legal Fees and Expenses............... 25,000
--------
$666,000
</TABLE>
- ----------------
*Except for the SEC Registration Fee, all expenses are estimates
Item 15. Indemnification of Directors and Officers
Article 8 of the By-Laws of Sun Life Assurance Company of Canada (U.S.)
provides for indemnification of directors and officers as follows:
"Section 8.01 (a). Every person who is or was a director, officer or
employee of this corporation or of any other corporation which he served at
the request of this corporation and in which this corporation owns or owned
shares of capital stock or of which it is or was a creditor shall have a
right to be indemnified by this corporation against all liability and
reasonable expenses incurred by him in connection with or resulting from any
claim, action, suit or proceeding in which he may become involved as a party
or otherwise by reason of his being or having been a director, officer or
employee of this corporation or such other corporation, provided (1) said
claim, action, suit or proceeding shall be prosecuted to a final
determination and he shall be vindicated on the merits, or (2) in the absence
of such a final determination vindicating him on the merits, the board of
directors shall determine that he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful; said determination to
be made by the board of directors acting through a quorum of disinterested
directors, or in its absence on the opinion of counsel.
(b) For purposes of the preceding subsection: (1) "liability and
reasonable expenses" shall include but not be limited to reasonable counsel
fees and disbursements, amounts of any judgment, fine or penalty, and
reasonable amounts paid in settlement; (2) "claim, action, suit or
proceeding" shall include every such claim, action, suit or proceeding,
whether civil or criminal, derivative or otherwise, administrative, judicial
or legislative, any appeal relating thereto, and shall include any reasonable
apprehension or threat of such a claim, action, suit or proceeding; (3) a
settlement, plea of nolo contendere, consent judgment, adverse civil
judgment, or conviction shall not of itself create a presumption that the
conduct of the person seeking indemnification did not meet the standard of
conduct set forth in subsection (a)(2) hereof.
II-1
<PAGE>
(c) Notwithstanding the foregoing, the following limitations shall
apply with respect to any action by or in the right of the Corporation: (1)
no indemnification shall be made in respect of any claim, issue or matter as
to which the person seeking indemnification shall have been adjudged to be
liable for negligence or misconduct in the performance of his duty to the
corporation unless and only to the extent that the Court of Chancery of the
State of Delaware or the court in which such action or suit was brought shall
determine upon application that, despite the adjudication of liability but in
view of all the circumstances of the case, such person is fairly and
reasonably entitled to indemnity for such expenses which the Court of
Chancery or such other court shall deem proper; and (2) indemnification shall
extend only to reasonable expenses, including reasonable counsel's fees and
disbursements.
(d) The right of indemnification shall extend to any person otherwise
entitled to it under this by-law whether or not that person continues to be a
director, officer or employee of this corporation or such other corporation
at the time such liability or expense shall be incurred. The right of
indemnification shall extend to the legal representative and heirs of any
person otherwise entitled to indemnification. If a person meets the
requirements of this by-law with respect to some matters in a claim, action,
suit or proceeding, but not with respect to others, he shall be entitled to
indemnification as the former. Advances against liability and expenses may
be made by the corporation on terms fixed by the board of directors subject
to an obligation to repay if indemnification proves unwarranted.
(e) This by-law shall not exclude any other rights of indemnification or
other rights to which any director, officer or employee may be entitled to by
contract, vote of the stockholders or as a matter of law. If any clause,
provision or application of this section shall be determined to be invalid,
the other clauses, provisions or applications of this section shall not be
affected but shall remain in full force and effect. The provisions of this
by-law shall be applicable to claims, actions, suits or proceedings made or
commenced after the adoption hereof, whether arising from acts or omissions
to act occurring before or after the adoption hereof.
(f) Nothing contained in this by-law shall be construed to protect any
director or officer of the corporation against any liability to the
corporation or its security holders to which he would otherwise be subject by
reason of wilful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of his office."
II-2
<PAGE>
Item 16. Exhibits
Exhibits:
Exhibit
Number Description Method of Filing
1 Form of Underwriting Agreement *
3(a) Certificate of Incorporation **
3(b) By-laws **
4(a) Form of Combination Fixed/Variable
Group Annuity Contract (Regatta
Platinum, Regatta Gold, Futurity II) ***
4(b) Form of Certificate (Regatta Platinum,
Regatta Gold, Futurity II) to be
used in connection with Contract
filed as Exhibit 4(a) ***
5 Legality Opinion ****
23 Independent Auditors' Consent ****
24 Powers of Attorney ****
* Incorporated by reference from Pre-Effective Amendment No. 1 to the
Registration Statement on Form N-4 of Sun Life of Canada (U.S.)
Variable Account F, File No. 333-37907, filed on January 16, 1998.
** Incorporated by reference from the Registration Statement on Form N-4
of Sun Life of Canada (U.S.) Variable Account F, File No. 333-37907,
filed on October 14, 1997
*** Incorporated by reference from Post-Effective Amendment No. 9 to the
Registration Statement on Form N-4 of Sun Life of Canada (U.S.) Variable
Account F, File No. 33-41628, filed on March 2, 1998.
**** Filed herewith.
Item 17. Undertakings
(a) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of
the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or in
the aggregate, represent a fundamental change in the information set
forth in the registration statement;
II-3
<PAGE>
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement;
Provided, however, that paragraphs (a)(1)(i) and a(1)(ii) do
not apply if the registration statement is on Form S-3 or Form S-8,
and the information required to be included in a post-effective
amendment by those paragraphs is contained in periodic reports filed
by the Registrant pursuant to Section 13 or Section 15(d) of the
Securities Exchange Act of 1934 that are incorporated by reference in
the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post- effective
amendment any of the securities being registered which remain unsold at
the termination of the offering.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons
of the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant, Sun Life Assurance Company of Canada (U.S.), certifies that it
has reasonable grounds to believe that it meets all of the requirements for
filing on Form S-2 and has duly caused this Registration Statement on Form
S-2 to be signed on its behalf by the undersigned, thereunto duly authorized,
in the Town of Wellesley Hills, Commonwealth of Massachusetts, on the 23rd
day of April, 1999.
Sun Life Assurance Company of
Canada (U.S.)
(Registrant)
By:* /s/ C. JAMES PRIEUR
-------------------------
C. James Prieur
President
Pursuant to the requirements of the Securities Act of 1933, this Form S-2
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s/ C. JAMES PRIEUR President and Director
- -------------------------- (Principal Executive Officer) April 23, 1999
C. James Prieur
/s/ ROBERT P. VROLYK Vice President, Finance
- ---------------------------- and Actuary (Principal
Robert P. Vrolyk Financial & Accounting
Officer) April 23, 1999
* /s/ DONALD A. STEWART Chairman and April 23, 1999
- ------------------------------- Director
Donald A. Stewart
* /s/ RICHARD B. BAILEY Director April 23, 1999
- ----------------------------
Richard B. Bailey
- ----------------------------
* By Edward M. Shea pursuant to Power of Attorney filed herewith.
II-5
<PAGE>
SIGNATURE TITLE DATE
* /s/ M. COLYER CRUM
- ------------------------------- Director April 23, 1999
M. Colyer Crum
* /s/ DAVID D. HORN Director April 23, 1999
- --------------------------------
David D. Horn
* /s/ JOHN S. LANE Director April 23, 1999
- --------------------------------
John S. Lane
* /s/ ANGUS A. MACNAUGHTON Director April 23, 1999
- ---------------------------------
Angus A. MacNaughton
* /s/ JOHN D. MCNEIL Director April 23, 1999
- -----------------------
John D. McNeil
* /s/ S. CAESAR RABOY Director April 23, 1999
- --------------------------------
S. Caesar Raboy
- -----------------------
* By Edward M. Shea pursuant to Power of Attorney filed herewith.
II-6
<PAGE>
EXHIBIT INDEX
Exhibit
Number Page
5 Legality Opinion
23 Independent Auditors' Consent
24 Powers of Attorney
II-7
<PAGE>
Sun Life Assurance Company of Canada (U.S.)
One Sun Life Executive Park
Wellesley Hills, Massachusetts 02181
Re: Registration Statement on Form S-2
Gentlemen and Ladies:
I have acted as counsel to Sun Life Assurance Company of Canada (U.S.)
(the "Company") in connection with the above-captioned registration
statement (the "Registration Statement") with respect to the registration of
certain annuity contracts (the "Contracts") with the Securities and Exchange
Commission under the Securities Act of 1933, as amended. In giving this
opinion, I have examined the Registration Statement and have examined such
other documents and perceived such questions of Delaware law as I considered
necessary and appropriate. Based on such examination and review it is my
opinion that:
1. The Company is a corporation duly organized and validly existing
under the laws of the state of Delaware.
2. The Contracts when issued in the manner described in the
Registration Statement will be validly issued and will represent binding
obligations of the Company and the Account under Delaware law.
I hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to reference this opinion under the caption "Legal
Matters" in the prospectus constituting a part of the Registration Statement.
Very truly yours,
Edward M. Shea, Esq.
April 23, 1999
<PAGE>
Exhibit 23
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of Sun Life
Assurance Company of Canada (U.S.) on Form S-2 of our report dated February
5, 1999 accompanying the statutory financial statements of Sun Life Assurance
Company of Canada (U.S.) appearing in the Prospectus, which is part of such
Registration Statement, and to the incorporation by reference of our report
dated February 5, 1999 appearing in the Annual Report on Form 10-K of Sun
Life Assurance Company of Canada (U.S.) for the year ended December 31, 1998.
We also consent to the references to us under the heading "Accountants" in
such Prospectus.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
April 23, 1999
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that John D. McNeil, whose signature
appears below, constitutes and appoints Edward M. Shea, Ellen B. King, Peter
F. Demuth and C. James Prieur, and each of them, his attorneys-in-fact, each
with the power of substitution, for him in any and all capacities, to sign a
Registration Statement on Form S-2 of Sun Life Assurance Company of Canada
(U.S.), and any amendments thereto, and to file the same, with exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming all that each of said
attorneys-in-fact or his substitute or substitutes, may do or cause to be
done by virtue hereof.
/s/ JOHN D. MCNEIL
------------------------------
John D. McNeil
February 4, 1999
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that John S. Lane, whose signature
appears below, constitutes and appoints Edward M. Shea, Ellen B. King, Peter
F. Demuth and C. James Prieur, and each of them, his attorneys-in-fact, each
with the power of substitution, for him in any and all capacities, to sign a
Registration Statement on Form S-2 of Sun Life Assurance Company of Canada
(U.S.), and any amendments thereto, and to file the same, with exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming all that each of said
attorneys-in-fact or his substitute or substitutes, may do or cause to be
done by virtue hereof.
/s/ JOHN S. LANE
------------------------------
John S. Lane
February 4, 1999
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that Donald A. Stewart, whose signature
appears below, constitutes and appoints Edward M. Shea, Ellen B. King, Peter
F. Demuth and C. James Prieur, and each of them, his attorneys-in-fact, each
with the power of substitution, for him in any and all capacities, to sign a
Registration Statement on Form S-2 of Sun Life Assurance Company of Canada
(U.S.), and any amendments thereto, and to file the same, with exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming all that each of said
attorneys-in-fact or his substitute or substitutes, may do or cause to be
done by virtue hereof.
/s/ DONALD A. STEWART
------------------------------
Donald A. Stewart
February 4, 1999
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that Angus A. MacNaughton, whose
signature appears below, constitutes and appoints Edward M. Shea, Ellen B.
King, Peter F. Demuth and C. James Prieur, and each of them, his
attorneys-in-fact, each with the power of substitution, for him in any and
all capacities, to sign a Registration Statement on Form S-2 of Sun Life
Assurance Company of Canada (U.S.), and any amendments thereto, and to file
the same, with exhibits thereto, and other documents in connection therewith,
with the Securities and Exchange Commission, hereby ratifying and confirming
all that each of said attorneys-in-fact or his substitute or substitutes, may
do or cause to be done by virtue hereof.
/s/ ANGUS A. MACNAUGHTON
------------------------------
Angus A. MacNaughton
February 4, 1999
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that S. Caesar Raboy, whose signature
appears below, constitutes and appoints Edward M. Shea, Ellen B. King, Peter
F. Demuth and C. James Prieur, and each of them, his attorneys-in-fact, each
with the power of substitution, for him in any and all capacities, to sign a
Registration Statement on Form S-2 of Sun Life Assurance Company of Canada
(U.S.), and any amendments thereto, and to file the same, with exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming all that each of said
attorneys-in-fact or his substitute or substitutes, may do or cause to be
done by virtue hereof.
/s/ S. CAESAR RABOY
------------------------------
S. Caesar Raboy
February 4, 1999
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that M. Colyer Crum, whose signature
appears below, constitutes and appoints Edward M. Shea, Ellen B. King, Peter
F. Demuth and C. James Prieur, and each of them, his attorneys-in-fact, each
with the power of substitution, for him in any and all capacities, to sign a
Registration Statement on Form S-2 of Sun Life Assurance Company of Canada
(U.S.), and any amendments thereto, and to file the same, with exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming all that each of said
attorneys-in-fact or his substitute or substitutes, may do or cause to be
done by virtue hereof.
/s/ M. COLYER CRUM
------------------------------
M. Colyer Crum
February 4, 1999
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that David D. Horn, whose signature
appears below, constitutes and appoints Edward M. Shea, Ellen B. King, Peter
F. Demuth and C. James Prieur, and each of them, his attorneys-in-fact, each
with the power of substitution, for him in any and all capacities, to sign a
Registration Statement on Form S-2 of Sun Life Assurance Company of Canada
(U.S.), and any amendments thereto, and to file the same, with exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming all that each of said
attorneys-in-fact or his substitute or substitutes, may do or cause to be
done by virtue hereof.
/s/ DAVID D. HORN
------------------------------
David D. Horn
February 4, 1999
<PAGE>
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that Richard B. Bailey, whose signature
appears below, constitutes and appoints Edward M. Shea, Ellen B. King, Peter
F. Demuth and C. James Prieur, and each of them, his attorneys-in-fact, each
with the power of substitution, for him in any and all capacities, to sign a
Registration Statement on Form S-2 of Sun Life Assurance Company of Canada
(U.S.), and any amendments thereto, and to file the same, with exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming all that each of said
attorneys-in-fact or his substitute or substitutes, may do or cause to be
done by virtue hereof.
/s/ RICHARD B. BAILEY
------------------------------
Richard B. Bailey
February 4, 1999
